23, March, 2016

Employment and Taxes in Latin America

This paper analyses the labour effects of taxes and explores empirically the effects of payroll taxes, the VAT and corporate income taxes. It uses national-level data of labour variables for 15 Latin American countries

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It empirically explores the effects of payroll taxes, value-added taxes and corporate income taxes on a variety of labour market outcomes such as employment, unemployment, informality, and wages. Using national-level data on labour variables for 15 Latin American countries, the results indicate that the effects of each tax are distinctly different and may depend on several aspects of labour and tax institutions. Payroll taxes reduce employment and increase labour costs when their benefits are not valued by workers, but otherwise increase labour participation and do not raise labour costs. Value-added taxes increase informality and reduce skilled labour demand. In contrast, corporate income taxes may help reduce informality, especially among low-education workers but, when tax enforcement capabilities are strong, may reduce labour participation and employment of medium- and high-education workers.
  • Author(s): Fajardo, D. J. & Lora, E.
  • Original Publication Date: September 2012
  • Publisher: International Development Bank
Click here to see the publication in PDF

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