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I evaluate how the tax reform of 2012 reduced informality in Colombia both theoretically and empirically. Theoretically, I develop a labor market model and obtain simulations indicating that the reform should reduce informality significantly. Empirically, I obtain difference-in-difference estimates from two household surveys. Estimates from the repeated cross-sections data indicate small, short-term effects and large long-term effects. Estimates from the household survey panel data are in line with these results. I also simulate difference-in-difference estimates with different combinations of changes in payroll taxes and enforcement indicating that large improvements would have been needed to obtain the corresponding econometric estimates.

William Beveridge talked about the five evils that he felt confronted society. He listed them as want, idleness, squalor, ignorance and disease. He was writing before the end of the World War II at a time of anxiety, uncertainty and expectation (Abel-Smith, 1992). The post war welfare state and the growth of prosperity would arguably have served to resolve some of the evils listed by Beveridge. The absolute poverty that he referred to is no longer as prevalent and education is now a legal requirement and funded by the state at least up to school leaving age.