Work and tax evasion incentive effects of social insurance programs

Bergolo, Marcelo; Cruces, Guillermo

Abstract

This article studies how social insurance programs shape individual's incentives to take up registered employment and to report earnings to the tax authorities. The analysis is based on a social insurance reform in Uruguay that extended healthcare coverage to the dependent children of registered private-sector workers. The identification strategy relies on a comparison between individuals with and without dependent children before and after the reform. The reform increased benefit-eligible registered employment by 1.6 percentage points (about 5% above the pre-reform level), mainly due to an increase in labor force participation rather than to movement from unregistered to registered employment. The shift was greater for parents with younger children and for cohabiting adults whose partners' jobs did not provide the couples' children with access to the benefit. Finally, the reform increased the incidence of underreporting of salaried earnings by about 4 percentage points (25% higher than the pre-reform level), mostly for workers employed at small firms. The increase in fiscal revenue from higher levels of registered employment was several orders of magnitude greater than the loss of revenue due to an increase in underreporting.

Citation

Bergolo, M., & Cruces, G. (2014). Work and tax evasion incentive effects of social insurance programs. Journal of Public Economics, 117, 211-228. https://doi.org/10.1016/j.jpubeco.2014.04.015

• Journal Article Type: Article
• Acceptance Date: Apr 30, 2014
• Online Publication Date: May 10, 2014
• Publication Date: 2014-09
• Deposit Date: Aug 7, 2019
• Journal: Journal of Public Economics
• Print ISSN: 0047-2727
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 117
• Pages: 211-228
• DOI: https://doi.org/10.1016/j.jpubeco.2014.04.015
• Keywords: Labor supply; Work incentives; Social insurance; Tax evasion
• Public URL: https://nottingham-repository.worktribe.com/output/2402161
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0047272714001066?via%3Dihub
• Additional Information: This article is maintained by: Elsevier; Article Title: Work and tax evasion incentive effects of social insurance programs; Journal Title: Journal of Public Economics; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.jpubeco.2014.04.015; Content Type: article; Copyright: Copyright © 2014 Elsevier B.V. All rights reserved.