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

Author

Listed:
  • Arbex Marcelo

    (Department of Economics, University of Windsor, Windsor, Canada)

  • Mattos Enlinson

    (São Paulo School of Economics, Fundação Getúlio Vargas, Sao Paulo, Brazil)

  • Regatieri Rebeca

    (PhD candidate, São Paulo School of Economics, Fundação Getúlio Vargas and Brazilian Treasury, Brasilia, Brazil)

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.

Suggested Citation

  • Arbex Marcelo & Mattos Enlinson & Regatieri Rebeca, 2024. "Optimal Taxation of Informal Firms: Misreporting Costs and a Tax Reform in Brazil," The B.E. Journal of Macroeconomics, De Gruyter, vol. 24(1), pages 1-44, January.
    • Handle: RePEc:bpj:bejmac:v:24:y:2024:i:1:p:1-44:n:3
    DOI: 10.1515/bejm-2022-0193
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    More about this item

    Keywords

    limited tax capacity; tax reform; optimal taxes; informal firms;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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