Informality in Latin America: Taxes and beyond · Informality: usual (and less usual) suspects •...

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Informality in Latin America: Taxes and beyond Angel Melguizo ELLA Summit on Informality and Inclusive Growth Johannesburg, October 4-5 2016

Transcript of Informality in Latin America: Taxes and beyond · Informality: usual (and less usual) suspects •...

Page 1: Informality in Latin America: Taxes and beyond · Informality: usual (and less usual) suspects • Difficulty for long-term planning • Imperfect design of social insurance Nor representative

Informality in Latin America: Taxes and beyond

Angel Melguizo

ELLA Summit on Informality and Inclusive Growth Johannesburg, October 4-5 2016

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2Lauenburg, 1890

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3MacondoPor Hernando Nossa

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Informality in Latin America: Taxes and beyond

• Informal is normal in Latin America

• Taxes and informality: in it together?

• Beyond taxes: a way forward

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Informality in Latin America: Taxes and beyond

• Informal is normal in Latin America

• Taxes and informality: in it together?

• Beyond taxes: a way forward

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Informal is normal in Latin America…

Source: Bosch, M., C. Pages and A. Melguizo (2013), Better Pensions, Better Jobs. IDB

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… for non-wage earners, workers in small firms, or low-income workers …

Source: Bosch, M., C. Pages and A. Melguizo (2013), Better Pensions, Better Jobs. IDB

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… and the emerging middle class

Source: Melguizo, A. (2015), Pensions, Informality and the Emerging Middle Class. IZA World of Labor.

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Informality in Latin America: Taxes and beyond

• Informal is normal in Latin America

• Taxes and informality: in it together?

• Beyond taxes: a way forward

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Informalities

Source: Bosch, M., C. Pages and A. Melguizo (2013), Better Pensions, Better Jobs. IDB

Workers

Costs > Benefits Benefits > Costs

Costs > Benefits

Firms

Benefits > Costs

Preference Exclusion

Optimal formalityDo channels exist?

Evasion

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Informality: usual (and less usual) suspects

• Difficulty for long-term planning

• Imperfect design of social insuranceNor representative economic/labour modelEnforcement (e.g. channeled through the wage bill)

• Disincentives to formality for firms/workersNon-wage labour costs and labour regulations (e.g. minwage)Non-contributory benefits

• Low trust in the State and/or financial sector

• Low productivity

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High costs of formality (taxes and labor regulation) could be playing a role…

Source: Pages, C. (2010), The Age of Productivity. IDB

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… especially when interacting with labor regulations

Source: Bosch, M., C. Pages and A. Melguizo (2013), Better Pensions, Better Jobs. IDB

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Taxing wages in Latin America: data first

Comparable statistics for 20 LAC countries on taxes on wages:

- Social contributions (compulsory; private+public) and personal income tax- Formal dependent worker- By levels of income (deciles and USD)- By family composition (single/couple; children)

Special focus: theoretical costs (taxes) to formalise

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Taxing wages in Latin America: definitions

Total labour costs- Employer social security contributions

Gross wages

-Employee social security contributions - Personal income tax

+ Cash transfers

Net wages

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Labour costs in Latin America and OECD(Average wage earner; social contributions and personal income tax; 2013)

Labour costs in LAC are heterogeneous, and lower than in OECD (wages and taxes)

Source: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

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Jama

ica

Nica

ragu

a

Peru

Hond

uras

El S

alvad

or

Trini

dad a

ndTo

bago

Domi

nican

Repu

blic

Guate

mala

Boliv

ia

Mexic

o

Vene

zuela

Colom

bia

Ecua

dor

Urug

uay

Para

guay

Pana

ma

Braz

il

Costa

Rica

Chile

Arge

ntina LAC

OECD

Net wages Tax wedge

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Lower labour costs are relatively low in LAC due to low taxes on wages (22% vs 36%)…

Source: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean

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… explained by the personal income tax (average formal worker is exempted)

Source: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean

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Personal income tax in LAC is borne fully by the two/three top deciles (low level though…)

Fuente: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean

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Employer contributions are alike in LAC and OECD

Source: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean

0% 5% 10% 15% 20% 25% 30%

OECDLAC

ChileHonduras

Trinidad y TobagoPeru

GuatemalaEcuadorJamaica

BoliviaVenezuela

El SalvadorPanamá

ParaguayDominican Rep

NicaraguaUruguay

MexicoCosta Rica

ArgentinaColombia

Brazil

Employer social contributions in Latin America and OECD(Average wage earner; % labour costs; 2013)

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What about those (55% workers) who are informal?

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Calculating the (tax) costs of formalisation..

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60%

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100%

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Tasa de informalidad Costo teórico de formalización

Source: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean

Informality rate Theoretical costs of formalisation

Informality and theoretical tax costs of formalisation in Latin America(Average LAC wage earner by income decile; % wages; 2013)

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40%

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80%

100%

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60%

80%

100%

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Chile

Tasa de informalidad Costo teórico de formalización

0%

20%

40%

60%

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100%

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20%

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80%

100%

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Centroamérica

Tasa de informalidad Costo teórico de formalización

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Colombia

Tasa de informalidad Costo teórico de formalización

Americas Latinas

Source: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean

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Taxes and informality are correlated for low and middle-income workers (vulnerable middle class)

Source: OECD/CIAT/IDB (2016), Taxing Wages in Latin America and the Caribbean

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Taxes and informality: in it together?

Theoretical indetermination and not conclusive empirics

Source: Gonzalez-Paramo, J.M. and A. Melguizo. (2013), Who pays labour taxes and social contributions? A meta-analysis approach. SERIES, 4, 247-71

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Informality in Latin America: Taxes and beyond

• Informal is normal in Latin America

• Taxes and informality: in it together?

• Beyond taxes: a way forward

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Procrastination and overconfidence traps

Have you thought about financing your retirement?

Source: Bosch, M., C. Pages and A. Melguizo (2013), Better Pensions, Better Jobs. IDB

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Usual suspects beyond taxes

• Difficulty for long-term planning

• Imperfect design of social insuranceNor representative economic/labour modelEnforcement (e.g. channeled through the wage bill)

• Disincentives to formality for firms/workersNon-wage labour costs and labour regulations (e.g. minwage)Non-contributory benefits

• Low trust in the State and/or financial sector

• Low productivity

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• Global: interactions between social protection (pensions, health) and taxes

+ Coordination among institutions (regulation, supervision, administration)

• Efficiency: incentives to formal labour participation• Innovation: supervision and compliance

mechanisms• Transparency: simple goals; public debate and

political agreements

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Principles of a pro-formality agenda

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Incentives for formal jobs (including tax cuts)Enforce/re-design (especially for self-employed)Increase information and financial education

Open databasesImpact evaluation

InnovateComunicationChannelsDefault options

Policy goals and levers

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Better jobs: Subsidizing formal employment…

45%

63%

Source: Bosch, M., C. Pages and A. Melguizo (2013), Better Pensions, Better Jobs. IDB

Projections of formality in Latin America

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Source: Bosch, M., C. Pages and A. Melguizo (2013), Better Pensions, Better Jobs. IDB

Better jobs: … at reasonable fiscal costs

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Better jobs: Financing choice would depend on current and future tax revenues

Consumption taxes and pension and health contributions in Latin America and the Caribbean, 2012 (Percentage of GDP)

Source: Bosch, M., C. Pages and A. Melguizo (2013), Better Pensions, Better Jobs. IDB

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Better jobs: Pro-formality policies and productive development policies - Skills…

Source: OECD/ECLAC/CAF (2014), Latin American Economic Outlook 2015.

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Empresas en Colombia que consideran como una barrera importante la falta de una fuerza laboral adecuadamente formada (% empresas formales, circa 2010)

Better jobs: … the new XXI century currency

Source: Melguizo, A. and J.R. Perea (2016), Mind the skills gap! Regional and industry patterns in emerging economies”. Working Paper 329. OECD Development Centre.

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Informality in Latin America: Summing up

• Informal is normal in Latin America(and we do not like it too much)

55% workersAlso a middle-class challenge

• Taxes and informality: in it together?Yes: taxes on wages can be burdensome, especially for thetransition informality-formality

• Beyond taxes: a way forwardComprehensive pro-formality package: incentives(monetary & nudged) and productive development policies

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Main references

• Better Pensions, Better Jobshttps://publications.iadb.org/handle/11319/462?locale-attribute=es

• Pensions at a Glance in LAChttp://www.oecd.org/publications/oecd-pensions-at-a-glance-pension-glance-2014-en.htm

• Taxing Wages in LAChttp://www.oecd.org/development/taxing-wages-in-latin-america-and-the-caribbean-2016-9789264262607-en.htm

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Thanks!

Angel Melguizo

ELLA Summit on Informality and Inclusive Growth Johannesburg, October 4-5 2016

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0.0%

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25.0%

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Single - 67 - 0 Single - 100 - 0 Single - 167 - 0

South Africa

Colombia

Taxing wages in Colombia and South Africa(Social contributions and personal income tax; 2013)