be considered in market income, regardless of whether a percentage of this is a transfer from the national government, which would avoid jumps throughout the distribution that could lead to wrong conclusions. Take an example; let's imagine a person who is currently working and has a labor income of $10,000,000 per month. Given this income, this person belongs to the upper part of the income distribution. Suppose this person belongs to decile 10 of the distribution. In one year, this same person is pensioned, and their only source of income is pension income, which is $10,000,000 monthly. Since 75.4 percent of the pension is a government transfer, this person would have a market income equal to $ 2,460,000, which would place her in decile 5 of the distribution, even though their monthly income would place her in decile 10. For this reason, for the calculations presented in this Box, the income distribution was calculated using market income plus pensions.

Finally, the Kakwani coefficient associated with transfers in respect to pensions is -0.1577, suggesting that pensions are regressive. When considering this scheme, we found that the GINI coefficient for market income would be 54.7, and the GINI coefficient for disposable income would be 51.7, suggesting a 3 points reduction. This variation is less than that found when considering all pensions as market income and all pensions as a transfer. In such cases, the reductions are 3.33 and 4.17 points, respectively.

N **ote:** * The minimum wage for 2017 was $737,717.

** More than 90 percent of pensioners in 2017 belonged to the RPM, as can be seen in the reports made by the Financial Superintendence of Colombia

# iii. Assumptions

In the present paper, no modeling of tax evasion, either direct or indirect, is performed. This exercise is due to a _de jure_ approximation, rather than _de facto._ In the remainder of the document when the term informality is used for the modeling of indirect taxes, this is due to the modeling of the non-payment of VAT established by law for all such commercial agents belonging to the simplified regime,<sup>32</sup> since belonging or not to the simplified regime depends on the income of the establishment, which is unknown, the assumption made in this paper is that the establishments classified as “informal” do not exceed the amount established by law. It is important to emphasize that what is sought with this treatment is to have an estimate of the incidence of VAT considering that the effective rate is lower than the statutory one (it is greater than zero for the VAT paid on inputs, but it also does not become equal to the statutory rate) and given that the economic effect is the same as when the establishment evades payment of the tax, the term informality is used for convenience in the literature.

In terms of taxes, only those that accrue to a person's income, namely income tax, and social security contributions, were considered. For income tax, income was classified according to its nature and per the five income types stipulated in the tax statute in force in 2017: labor, pensions, capital, non-labor, and dividends. We use information from DIAN administrative records to clean the income for each income type; precisely, the data used was the percentage of deductible and exempted income. This was considered because the survey does not ask for many of the deductible items, and when applying the

> 32 An economic agent belongs to the simplified regime if it meets the following characteristics: (i) The total gross income derived from the commercial activity of the previous year is less than 3500 UVT (units of tax value), a sum that for 2017 is equivalent to $ 104,136,000; (ii) They have only one site, store, commercial establishment, office or business to carry out their profession or activity; (iii) They do not carry out activities under the model of a franchise, concession, royalty, authorization or other system that involves the exploitation of intangible assets in the aforementioned place; (iv) They are not customs users; (v) During the current or previous year, they have not signed contracts for the sale of goods or the provision of services taxed in an amount equal to or greater than 3500 UVT, that is, $104,136,000 in 2017, and that (vi) The sum of the bank deposits, financial deposits or investments associated with their name and made during the current or previous year does not exceed 3500 UVT overall, that is, $104,136,000 in 2017.

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