Payroll taxes, social security, and informality: The 2012 tax reform in Colombia

I evaluate how the tax reform of 2012 reduced informality in Colombia both theoretically and empirically. Theoretically, I develop a labor market model and obtain simulations indicating that the reform should reduce informality significantly. Empirically, I obtain difference-in-difference estimates from two household surveys. Estimates from the repeated cross-sections data indicate small, short-term effects and large long-term effects. Estimates from the household survey panel data are in line with these results. I also simulate difference-in-difference estimates with different combinations of changes in payroll taxes and enforcement indicating that large improvements would have been needed to obtain the corresponding econometric estimates.