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

  • Marcelo Arbex , Enlinson Mattos EMAIL logo and Rebeca Regatieri
Published/Copyright: October 19, 2023
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 24 Issue 1

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
JEL Classification: H21; H26; H32
Corresponding author: Enlinson Mattos, São Paulo School of Economics, Fundação Getúlio Vargas, Sao Paulo, Brazil, E-mail:

This paper previously circulated under the title: “Limited Tax Capacity and the Optimal Taxation of Firms”. EM acknowledges financial support by Fapesp research grant #2018/01080-1. We have benefited comments and suggestions from Joel Slemrod, James Hines Jr., Christian Trudeau, Tobias Hauck, Xuan Wang, Anh Pham and all participants at the PFFLS 2019 – University of Michigan, EESP-FGV 2021 Series of Seminars and IIPF 2021 and SBE-2021 conferences. Any errors are our own.

Funding source: Fundação de Amparo à Pesquisa do Estado de São Paulo

Award Identifier / Grant number: #2018/01080-1

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Supplementary Material

This article contains supplementary material (https://doi.org/10.1515/bejm-2022-0193).

Received: 2022-12-19
Accepted: 2023-09-26
Published Online: 2023-10-19

© 2023 Walter de Gruyter GmbH, Berlin/Boston

Articles in the same Issue

  1. Frontmatter
  2. Advances
  3. Optimal Taxation of Informal Firms: Misreporting Costs and a Tax Reform in Brazil
  4. Initial Beliefs Uncertainty
  5. Credit Resource Misallocation and Macroeconomic Fluctuations in China: From the Perspective of Heterogeneous Financial Frictions
  6. The Bitcoin Premium: A Persistent Puzzle
  7. Contributions
  8. Intermediate Goods–Skill Complementarity
  9. Perfect Competition and Fixed Costs: The Role of the Ownership Structure
  10. Optimal Monetary Policy with Government-Provided Unemployment Benefits
  11. Employment Protection in Dual Labor Markets: Any Amplification of Macroeconomic Shocks?
  12. A Tide that Lifts Some Boats: Assessing the Macroeconomic Effects of EU Enlargement
  13. Current Account Balances’ Divergence in the Euro Area: An Appraisal of the Underlying Forces
  14. Merging Structural and Reduced-Form Models for Forecasting
  15. Trust in Government in a Changing World: Shocks, Tax Evasion, and Economic Growth
  16. The Fiscal Multiplier of Public Investment: The Role of Corporate Balance Sheet
  17. Does Uncertainty Matter for the Fiscal Consolidation and Investment Nexus?
  18. Government Spending Between Active and Passive Monetary Policy: An Invariance Result
  19. A DSGE Model with Government-owned Banks
https://doi.org/10.1515/bejm-2022-0193
Keywords for this article
limited tax capacity; tax reform; optimal taxes; informal firms

Articles in the same Issue

  1. Frontmatter
  2. Advances
  3. Optimal Taxation of Informal Firms: Misreporting Costs and a Tax Reform in Brazil
  4. Initial Beliefs Uncertainty
  5. Credit Resource Misallocation and Macroeconomic Fluctuations in China: From the Perspective of Heterogeneous Financial Frictions
  6. The Bitcoin Premium: A Persistent Puzzle
  7. Contributions
  8. Intermediate Goods–Skill Complementarity
  9. Perfect Competition and Fixed Costs: The Role of the Ownership Structure
  10. Optimal Monetary Policy with Government-Provided Unemployment Benefits
  11. Employment Protection in Dual Labor Markets: Any Amplification of Macroeconomic Shocks?
  12. A Tide that Lifts Some Boats: Assessing the Macroeconomic Effects of EU Enlargement
  13. Current Account Balances’ Divergence in the Euro Area: An Appraisal of the Underlying Forces
  14. Merging Structural and Reduced-Form Models for Forecasting
  15. Trust in Government in a Changing World: Shocks, Tax Evasion, and Economic Growth
  16. The Fiscal Multiplier of Public Investment: The Role of Corporate Balance Sheet
  17. Does Uncertainty Matter for the Fiscal Consolidation and Investment Nexus?
  18. Government Spending Between Active and Passive Monetary Policy: An Invariance Result
  19. A DSGE Model with Government-owned Banks
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