Firm size distribution and informality effects of a revenue-dependent tax policy

Bruna Alvarez, João Paulo Pessoa and André Souza

No 561, Textos para discussão from FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil)

Abstract: We study how revenue-dependent tax policies affect wages, productivity, and welfare in an economy where formal and informal firms co-exist. We use a dynamic entrepreneurial choice model and bring it to the data to assess the effects of the Brazilian Simples, a simplified tax scheme that reduces the tax burden of small- and medium-sized firms. We find that the Simples increases firm formalization, raising the demand for labor and benefiting workers. Meanwhile, tax collection falls as some formal firms withhold production to pay lower taxes. Overall, productivity (weighted by firm size), per capita production, and welfare fall. Alternative policies that reduce the tax gap between small and large firms perform better in welfare and tax collection terms.

Date: 2022-12-19
New Economics Papers: this item is included in nep-bec, nep-dge, nep-ent, nep-iue, nep-pbe, nep-pub and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:eesptd:561

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