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Progressive tax policy and informal labor in developing economies

Castañeda, N; Doyle, D; (2019) Progressive tax policy and informal labor in developing economies. Governance , 32 (4) pp. 595-618. 10.1111/gove.12390. Green open access

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Abstract

Governments in many industrializing democracies face difficult policy trade-offs. Liberalization and informality have placed electoral pressure on them to expand non-contributory social spending. However, governments in developing democracies face constraints when attempting to finance this expansion. In some countries, the informal labor market is very large, thereby undermining the revenue that can be collected through income tax. We argue that this has given rise to a paradoxical situation. Left governments in developing democracies with large informal labor markets have a strong electoral incentive to expand welfares regimes to previously excluded outsiders but to fiscally underwrite this expansion, they have increasingly been forced to fund their redistributive strategies via a regressive policy instrument, indirect consumption taxation. We examine this argument for a sample of 17 Latin American countries between the years 1990 to 2016. Our results suggests that labor informality forces left governments to turn to indirect taxation.

Type: Article
Title: Progressive tax policy and informal labor in developing economies
Open access status: An open access version is available from UCL Discovery
DOI: 10.1111/gove.12390
Publisher version: https://doi.org/10.1111/gove.12390
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: Tax policy, redistribution, informal labor markets, taxation–developing economies
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Institute of the Americas
URI: https://discovery.ucl.ac.uk/id/eprint/10064850
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