Optimal Taxation of Informal Firms: Misreporting Costs and a Tax Reform in Brazil

Marcelo Arbex, Enlinson Mattos and Regatieri Rebeca ()
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Regatieri Rebeca: PhD candidate, São Paulo School of Economics, Fundação Getúlio Vargas and Brazilian Treasury, Brasilia, Brazil

The B.E. Journal of Macroeconomics, 2024, vol. 24, issue 1, 1-44

Abstract: This paper investigates multistage taxes on firms in a limited tax capacity economy. We characterize the optimal taxation of informal firms reinterpreting behavioral and mechanical effects. Our numerical exercises highlight the relationship between misreporting costs and the elasticities of reported revenues and costs. We explore a tax reform in Brazil with a survey of informal firms to estimate these elasticities (0.55 and 0.94, respectively), which imply smaller sheltering costs for input expenditures. The optimal multistage tax system includes (i) differential linear taxes across the production chain and (ii) a positive, but very small, tax refund rate.

Keywords: limited tax capacity; tax reform; optimal taxes; informal firms (search for similar items in EconPapers)
JEL-codes: H21 H26 H32 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/bejm-2022-0193

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