Do bigger firms pay lower corporate tax in Colombia?

(With Liliana Heredia, Angie Nieto and Lucia Salamanca, Working Paper)

We present evidence that larger firms in Colombia pay lower corporate income taxes. Though we do not have data on individual firms, we employ databases that group firms by percentiles of gross income and by economic activities. We measure firm size using both gross income and total assets. Our findings consistently indicate that percentiles and economic activities associated with larger firms face a lower Effective Tax Rate (ETR). Using the database of firms sorted by percentile of gross income, we find that firms that are twice as large as others may experience an ETR between 1.7 and 2.5 percentage points lower, depending on the metric used to define a firm's size.

Mandatory retirement savings in the presence of an informal labor market

(Journal of Population Economics, 2023 Jul 27:1-32)

This paper shows how mandating workers to save more for retirement can lead them to work informally and save less. Consider a worker who is more productive in the formal sector but works informally to avoid mandatory retirement contributions. Lowering the contribution rate (the share of wages mandated to be saved) will paradoxically increase her retirement savings. The reason for this is that working informally acts as borrowing against mandatory savings. The implicit cost of such borrowing, and hence the opportunity cost of working informally, rises as the contribution rate drops. This creates a substitution effect favoring formal work, driving the worker towards the formal sector. As her formal income increases, the base for her mandatory contributions rises, expanding her retirement savings. Therefore, the optimal contribution rate is no greater than the highest contribution rate under which the worker prefers to work exclusively in the formal sector.

Matlab Code 

On the efficiency of mandatory retirement savings under endogenous borrowing constraints

Mandatory contributions to retirement saving accounts may tighten existing borrowing constraints, forcing individuals to forgo profitable investment options. This welfare-detrimental effect can be offset if retirement savings are allowed to serve as collateral. Moreover, some credit market imperfections may disappear altogether if this later policy is combined with a pension system with unconditional basic savings.

Uneven gains: The macroeconomic and welfare effects of the business tax reform

This paper assesses the macroeconomic and welfare effects of the 2017 U.S. tax reform. This assessment is carried out by simulating the enacted business tax cuts in a dynamic general equilibrium model calibrated to replicate the household income distribution in the U.S. The simulation suggests that the cuts will lead to increases in investment, wages and output, although the welfare gains are quite unevenly distributed across households. Despite the aggregate net gains for the economy, households at the bottom of the income distribution are going to be worse-off unless the spending cuts necessary to balance the federal budget are targeted at households at the top of the income distribution.