The Colombian Tax Reform of 2012 had as main objective to promote labor formalization. This paper
seeks to evaluate the effectiveness of this reform with a dynamic stochastic general equilibrium model
calibrated for Colombia. This model has two productive sectors (formal and informal) and a tax structure
that captures the major changes of the reform. The results indicate that the new tax policy had a positive
impact in reducing labor informality by 2.3 percentage points. Furthermore, when we account for the
natural pre-announcement period of any tax reform, variables such as output, consumption, investment
and labor informality have the opposite behavior in the short-term when compared to their long-run
dynamics. Thus, we find that once the tax reform is announced, an increase in informal employment is
observed although this performance was reversed in the long run. We validate this behavior with the
observed Colombian data right after the announcement of the reform. This result reflects the importance
of including in the analysis the timing of policy changes to explain the response in macroeconomic
variables.