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dc.titleLabor Income Tax Progressivity with a Large Informal Sector (Discussion Paper)
dc.contributor.authorAyres, João
dc.contributor.authorPedroni, Marcelo
dc.contributor.authorRossi, José Luiz
dc.contributor.orgunitDepartment of Research and Chief Economist
dc.coverageBrazil
dc.date.available2025-09-23T00:09:00
dc.date.issue2025-09-23T00:09:00
dc.description.abstractWe study labor income tax progressivity in an economy with a large informal sector. When the cost of informality rises with productivity, greater progressivity can simultaneously reduce inequality and enhance efficiency. We extend a standard heterogeneous-agent incomplete markets model to include workers choice between formal and informal employment, calibrating it to Brazilian data. The informal sector features a distinct productivity process and partial tax avoidance, consistent with empirical evidence. A policy experiment shows that increasing progressivity lowers inequality and raises GDP without reducing government revenues. The results offer a novel rationale for progressive taxation in economies with widespread informality.
dc.format.extent23
dc.identifier.doihttp://dx.doi.org/10.18235/0013717
dc.identifier.urlhttps://publications.iadb.org/publications/english/document/Labor-Income-Tax-Progressivity-with-a-Large-Informal-Sector-Discussion-Paper.pdf
dc.language.isoen
dc.publisherInter-American Development Bank
dc.subjectInformal Economy
dc.subjectTaxation
dc.subjectProductivity
dc.subjectIncome Distribution
dc.subjectIncome Tax
dc.subjectWage
dc.subjectLabor Force
dc.subjectTax Rate
dc.subjectInformal Labor
dc.subjectGovernment Revenue
dc.subject.jelcodeD30 - Distribution: General
dc.subject.jelcodeD52 - Incomplete Markets
dc.subject.jelcodeE20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General
dc.subject.jelcodeJ22 - Time Allocation and Labor Supply
idb.identifier.pubnumberIDB-DP-01102
idb.operationRG-K1098
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