<p>A salient feature of emerging economies is that fiscal policy is conducted against the traditional stabilization recipe. Government spending is procyclical (falls in recessions) while tax rates, in particular labor taxes, move countercyclically (increase in recessions). We account for this observation as the outcome of a model where the government conducts fiscal policy optimally and is able to commit to future policies. The setup is a small open economy with incomplete markets and a rich labor market structure including an informal sector. Government spending is valued by a representative household, financed either by distorting labor taxes or by non-contingent debt. Our main quantitative result shows that the presence of an informal sector widens the set of parameters under which the optimal labor tax is negatively correlated with output. This result follows from the buffering effect of the informal sector on total employment (reflected in a countercyclical informality rate) which amplifies the volatility of the tax base over the business cycle.</p>