B2-[Rocha et al 2017] - Do-Lower-Taxes-Reduce-Informality-Evidences-from-Brazil


 

ANALYSIS OF ARTICLE

Article B2 analyzes the period of 2009-2012 for the introduction of the MEI program in Brazil. Since then, the number of registered firms has grown from ~2.6M MEI firms in 2012 to ~11M firms in 2021.

Article B1 shows data from 2009-2015, and present results that show that both (1) reduction of entry cost and (2) reduction of ongoing taxes have impact on MEI growth, while this article B2 with data from 2009-2012 shows that only (2) happens.

New data from MEI from 2019 may provide subsidy for further investigation on the application of the policy.

 

 

SUMMARY OF ARTICLE

 

Section 1 (Introduction) – Paper aims to analyze the effects of reducing ongoing formality costs to a firm by estimating the impact of a large-scale program in Brazil called MEI (Individual Micro-Entrepreneur Program – IMP), introduced in 2009.

Exogeneity comes from a pre-existing tax framework for micro, small and medium enterprises. Identification hypothesis comes from no indication that the Government handpicked specific industries to IMP.

Results show that industries eligible to the tax reduction experienced an increase of 4.8% in the number of formal firms, coming mainly from the formalization of existing informal businesses, and not from new formal firms. Increase does not come from reducing entry costs, but from reducing taxes once registration costs get eliminated.

 

 

Section 2 (Institutional Setting) – Explains the MEI program, eligibility, reductions in costs, etc. Also explains the impact of taxes comparing SIMPLES and the two phases of IMP, demonstrating that the final IMP was more beneficial to the entrepreneur from the 25th percentile compared to Simples.

 

 

Section 3 (Data) – Authors use 3 databases:

1-      Registro Anual de Informacões Sociais (RAIS) – employer-employee data set with the universe of formal works and firms in Brazil, with annual frequency. Used data from Jan-2006 to Dec-2012, organized quarterly, at the industry-by-region level

2-      Brazilian Monthly Employment Survey (PME) – rotating panel at individual level. It tracks each household for 4 consecutive months, rest for 8 and re-interview for other 4 months. Used data from Jan-2006 to Aug-2012, at individual level and aggregated at the industry-by-region level.

3-      National Household Survey (PNAD) – annual cross-section representative of the entire country with information on industry classification at the same level of disaggregation used to define program eligibility.

 

Section 4 (Empirical Strategy) – uses Diff-in-Diff, with two set of regressions: (1) Estimate aggregate policy effects at the industry-by-region level using RAIS or PME; (2) Individual transitions from informal to formal

 

 

Section 5 (Results)

a)      Aggregate Effects – results show that halving the ongoing taxes increase the number of formal firms, and evidence indicates it comes from the formalization of existing small informal business rather than the creation of new formal firms.

b)      Individual Effects – results show too that IMP2 impact formalization, either by industry or by income.

 

Section 6 (Final Remarks)

Authors conclude that:

1)      Reducing registration costs has no effect on firm informality

2)      Reducing the tax burden does increase formalization

This effect comes from informal firms becoming formal, and not from the creation of new formal business nor greater survival of existing formal firms.

Entrepreneurs that formalized with MEI did not get an increase on their income in the short run (consistent with the view that small firms perceive little benefits from formalization)

 


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