Informality, tax policy and the business cycle: Exploring the links

Authors: Catalina Granda Carvajal y Danny García

Moderators: Jorge Iván Bula Escobar, Director del Centro de Investigaciones para el Desarrollo (CID) de la Universidad Nacional de Colombia (UNAL) y Leonardo Urrea profesor de la FCE UNAL

Date: November 17th, 2021

This study explores the interactions between the informal economy and tax policy and how these are shape by business cycle fluctuations. For this, we identify robust determinants of informality and taxation using an econometric analysis that accounts for bi-directional causality. Focusing on two dimensions of informal activity and tree tax policy instruments and employing numerous determinants over dozens. of model combinations, we find the significance of the relationship between informality and taxation depends on the specific tax under consideration. Also, business cycles influence informality and tax policy, so direct taxes are acyclical or countercyclical while indirect taxes are strongly procyclical.