| Abstract: |
The aim of this paper is twofold. First, it provides a comprehensive
assessment of the financial cost informal workers would incur if they entered
formal employment in five Latin American countries: Bolivia, Colombia,
Ecuador, Peru, and Venezuela. Then, it analyzes the extent to which
formalizing informal workers would contribute to increase fiscal capacity. Our
results show a wide variation in formalization tax rates ranging between 8.5
percent in Venezuela and 65 percent in Colombia. Formalization costs are
particularly high for self-employed informal workers, and mainly driven by the
burden associated to social insurance contribution payments. Interestingly,
potential formalization of informal workers with the highest probability of
being formal would allow capturing a substantial share of the additional tax
revenue lost due to informality and would reduce inequality. The comparative
analysis highlights the possibility of adopting strategies to reduce the
financial burden to formalization of certain population groups in the region. |