Macroeconomic Effects of Taxation on Firms in an Evasion and Informality Environment

Abstract

In this paper we analyze the effects of two size-dependent policies established for Mexican firms in a context where evasion, informality and transaction costs favor small firms over large ones. To analyze these effects we use a model that simulates the US economy and apply these policies and transaction costs to the model, while allowing for evasion and informality as they are observed in Mexico. Lastly, we compare the resultant simulated economy with data from the Mexican economy and conclude that these policies increase the employment share of small firms. We also study the case when the workers do not fully value mandated benefits and its effects on the workers’ wage and on the economy.