if (i) the production functions of the formal and informal sectors allowed larger productivity in the formal sector than in the informal one (i.e., yformal = (Lformal)<sup>�form al</sup> , yinformal = (Linformal)<sup>�inform al</sup> , and �informal < �formal < 1), as it is frequently assumed based on ...rm level data evidence, and/or (ii) if there existed a segmentation in the labor market where formal workers were paid more than informal ones (i.e., �formal = yformal � wLformal", where 1 > " > 0), as empirical evidence strongly suggests.

# 3 Computation of tax multiplier and standard error

The derivation of equation (7) is as follows. Recall that the multiplier for time horizon h is typically de...ned as �Yh=�Rh, where R is the real VAT revenue, Y is the real output, �Yh � Yt+h � Yt, and �Rh � Rt+h � Rt. Notice that �Yh=�Rh = (�Yh=Y )= (�Rh=Y ). From equation (6), �Yh=Y = �h�t. Therefore, �Yh=�Rh = �h�t= (�Rh=Y ). Since R � I � Y , then �Rh � Y � �Ih + I � �Yh. Further, given that e � I=t is taken as a constant, then �Ih = e � �th. Hence, �Yh=�Rh = �h�t= (e � �th + I � �h � �t). Since �th � �h � �t, then �Yh=�Rh = �h= (e � �h + �h � I).

The derivation of equation (8) is as follows. From (7), Tax multiplier = f (x), where f (x) = x=(e � �h + x � I). Using a ...rst-order approximation, it follows that the Tax multiplier evaluated around a equals f (x) � f (a) + f<sup>0</sup> (a) (x � a) = f (a) + f<sup>0</sup> (x) x � f<sup>0</sup> (x) a. Hence, the variance of the Tax multiplier equals V ar [f (x)] � 0 + [f<sup>0</sup> (x)]<sup>2</sup> V ar(x) � 0 = [f<sup>0</sup> (x)]<sup>2</sup> V ar(x). Evaluating f (x) at �h, V ar [Tax multiplier (h)] = [f<sup>0</sup> (�h)]<sup>2</sup> V ar [�h]. Hence, Tax multiplierSE (h) = f<sup>0</sup> (�h) � �<sup>SE</sup> h<sup>.</sup> Using (7), it follows that Tax multiplierSE (h) = [(e � �h)= (e � �h + �h � I)<sup>2</sup> ] � �<sup>SE</sup> h<sup>.</sup>

# 4 External estimates of VAT/indirect taxation multipliers

Regarding Peru: Estimates of Peru’s Fiscal Council, 2018, “Cambios en la tasa del impuesto general a las ventas (IGV) y su efecto en la recaudación ...scal y actividad económica”reports the GDP growth response after one year of the VAT rate changes of 2003 (from 18% to 19%) and 2011 (from 19% to 18%). We use Peru’s (i) average VAT revenue (as a percentage of GDP) for the period 1990-2010 from OECD (which equals 5%) and (ii) ratio of VAT revenue (as a percentage of GDP) to the tax rate (which equals 0.28) and equation (8) to calculate the associated tax multiplier values.

Regarding Dominican Republic: Hamilton Taveras, 2017, “Shocks de información y efectos de una reforma tributaria en la Republica Dominicana: Un enfoque a partir de los modelos DSGE Bayesianos” reports the GDP growth response after one year of the VAT rate change using a Bayesian DSGE model calibrated for the period 2007-2015. During such a period, Dominican Republic changed its VAT rate only once, from 16% to 18% in 2013. We use Dominican Republic’s (i) average VAT revenue (as a percentage of GDP) for the period (which equals 2.9%) and (ii) ratio of VAT revenue (as a percentage of GDP) to the tax rate (which equals 0.2) and equation (8) to calculate the associated multiplier value.

Regarding Colombia: Bancolombia, 2016, “Análisis especial: El proyecto de reforma tributaria y sus efectos macroeconómicos”reports the GDP growth e¤ect after one year of the VAT rate change from 16% to 19% in 2017. We use Colombia’s (i) average VAT revenue (as a percentage of GDP) for the period 1990-2010 from OECD (which equals 4%) and (ii) ratio of VAT revenue (as a percentage of GDP) to the tax rate (which equals 0.31) and equation (8) to calculate the associated multiplier value.

Regarding Portugal: Pereira and Wemans, 2013, “Output e¤ects of a measure of tax shocks based on changes in legislation for Portugal” use the narrative approach covering the period 1996-2012 to 45