Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129968
Authors: 
Antón, Arturo
Leal, Julio
Year of Publication: 
2015
Series/Report no.: 
Working Papers, Banco de México 2015-04
Abstract: 
In a typical developing country, coverage of the contributory social security system is low. We analyze the aggregate effects of a revenue-neutral fiscal-cum-social policy reform that consists of: 1) the implementation of universal social insurance to replace the system with low coverage; and 2) the elimination of the social security payroll tax to replace it with a generalized VAT. We find that this reform increases productivity by 2 percent and output by 3 percent as it improves the allocation of resources across firms and sectors, and generates a substantial change in occupational choices. Thus, wages (before transfers) increase for all employees. Also, due to the reconfiguration of transfers, earnings (wages after transfers) for informal employees increase relative to the earnings of formal employees, which decreases inequality. However, the reform could affect some groups in the population,given the regressive nature of VAT and heterogeneity in the valuation of transfers across workers.
Subjects: 
Universal Social Insurance
Fiscal Reform
Inequality
VAT
Allocation of Resources across Firms and Sectors
JEL: 
E62
H55
O17
O47
Document Type: 
Working Paper
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