Payroll Taxes and the Labor Market: A Computable General Equilibrium Analysis
Latin American Journal of Economics, Vol. 49 (1), May 2012, pp. 99-123
Posted: 2 Jun 2012
Date Written: May 1, 2012
This study uses a computable general equilibrium model to analyze the ef fects of eliminating Colombia’s parafiscal taxes, which finance social programs. In the model, these are sbstituted by alternative financing sources: VAT, indirect taxes or taxes on capital. The results show that elimination of parafiscal taxes produces a one percentage point decrease in the unemployment rate, as long as these are not substituted by other taxes. However, when other taxes are substituted for parafiscal taxes, there may not be any ef fect on the unemployment rate. This implies that eliminating parafiscal taxes does not produce the effects expectedby a partial equilibrium analysis, that is, a significant reduction in the unemployment rate.
Keywords: Payroll taxes, applied general equilibrium, tax replacement
JEL Classification: C68, H22, J31
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