The Colombian government recently reformed the tax law by reducing payroll
contributions from 29.5% to 16% and substituting them with a profit tax. The law was
passed in December 2012, and two years later the informality rate in the 13 main
metropolitan areas diminished from 56% to 51% in December 2014 (using the legal
definition of informality). In the whole survey the reduction was a little less pronounced,
going from 68% to 64%. This period was also characterized by high, yet also diminishing
growth rates; changes in the tax rates, and increasing real minimum wages. It is of the most
interest to know how much of this reduction was due to the tax reform. This paper performs
this task using a Matching and Difference in Differences methodology. According to the
results, the tax reform reduced the informality rate, of the workers affected by the reform in
the 13 main metropolitan areas, between 4,3 and 6,8 p.p. which translated in a reduction of
the informality rate between 2,0 and 3,1 p.p. given that the treated population was only
45% of the working population of the country in 2012. The impact over the whole survey
was between 4,1 and 6,7 which translates into 1,2 to 2,2 p.p. impact on the informality rate
of the whole country. Similar results were found using the firm definition of informality.
The reform affected mostly salaried workers and employers, males between 25 and 50
years old and workers with low levels of education.