Switching from Payroll Taxes to Corporate Income Taxes: Firms’ Employment and Wages after the 2012 Colombian Tax Reform

By Bernal, Raquel; Eslava, Marcela et al. | Economia, Fall 2017 | Go to article overview

Switching from Payroll Taxes to Corporate Income Taxes: Firms’ Employment and Wages after the 2012 Colombian Tax Reform


Bernal, Raquel, Eslava, Marcela, Meléndez, Marcela, Pinzón, Alvaro, Economia


(ProQuest: ... denotes formulae omitted.)

Social security systems aimed at covering workers against the risks of old-age poverty, sickness, work-related accidents, and unemployment are frequently financed via mandatory payroll contributions paid by both employers and employees, with employers usually responsible for the larger share of the contribution.1 In much of Latin America, high payroll taxes have been pinpointed as one of the causes of high informality and high unemployment.2

In Colombia, payroll taxes have been used to finance not only health coverage, maternity leave provisions, and pensions, but also monetary subsidies and in-kind transfers for low-income workers.3 Employers are also responsible for mandatory bonuses and annual severance payments. Put together, these costs imposed by regulation added more than 50 percent to a firm's wage bill by 2012. This rate had been increasing over the last two decades from an already high 40 percent in 1992. Costs attached to these regulations come on top of a mandatory minimum wage that exceeds the median income of workers in the country.

Extremely high payroll taxation in Colombia is a source of concern for analysts and policymakers, given its expected negative effects on employment and labor formality. Both unemployment and informality have, in fact, been very high over the past two decades. Consequently, the Colombian Congress approved a tax reform in December 2012 that reduced employer contributions by 13.5 percentage points for workers earning below ten minimum monthly wages. This group of workers represents the vast majority of the Colombian workforce (specifically, 98 percent of workers of private firms with at least two employees). In particular, the reform eliminated a 3 percent contribution to the National Family Welfare Agency (ICBF), a 2 percent contribution to the National Adult Training Agency (SENA), and 8.5 percent of the employers' contributions for workers' mandatory health insurance.

One of the objectives of the reform was to stimulate the creation of formal employment. To compensate for lost income from payroll taxes, the reform also increased corporate income taxes by reducing some of the exemptions that firms were previously allowed to claim to reduce their taxable income. In particular, the corporate income tax rate fell by 8 percentage points, while a new 9 percent tax on firm profits, called CREE, was imposed. The tax base over which firms pay CREE, however, is larger than the base for the corporate income tax, because exemptions were eliminated. Thus, more than a reform that reduced the tax burden, this was a reform that shifted the burden from formal employment to corporate income. The amount of benefits received by workers was not affected by the reform.

This reform offers a unique opportunity to analyze the effectiveness of replacing payroll taxes with taxes that do not distort the incentives to hire workers relative to other inputs of production, but that are still levied on firms. With this motivation, we analyze the effects that the reform had on formal employment and wages, using detailed firm-level administrative data covering all formal employment in the country before and after the reform.

The focus on firms is natural, to the extent that it is firms' hiring and wage policies that are directly distorted by payroll taxes. At the same time, identifying the effects of this reform on firms is particularly challenging, since the reform did not focus on particular firms or sectors. We take advantage of the fact that not-for-profit firms, many of which are de facto for profit, were exempted from the components of the reform under analysis. Though we do not have information on firms' individual tax regimes, we do know the sector to which a firm belongs. Because firms in the education and training sector are with few exceptions registered as not-for-profit, we are able to use these firms to construct a control group. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Switching from Payroll Taxes to Corporate Income Taxes: Firms’ Employment and Wages after the 2012 Colombian Tax Reform
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.