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The economic effects of the elimination of taxation on investment: the case of ICMS in Brazil

Author

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  • Nelson Leitao Paes

    (Universidade Federal de Pernambuco/Universidade Federal do Mato Grosso)

Abstract

This paper analyzes the economic impact of the exclusion of the state tax (ICMS) on investment in capital goods. Purchases of machinery and equipment in Brazil pay taxes as a consumption good and these taxes are refunded in 48 monthly installments without interest. We have used a general equilibrium model with two types of investment and disaggregation in the public sector. The results suggest a positive impact on the economy, but the loss of states revenue may reach 1.5%, which could be offset by an increase on consumption taxes. The greatest risks for this tax reform are concentrated in the short term, either by the loss of revenue, or because of a transitory drop in consumption and welfare.

Suggested Citation

  • Nelson Leitao Paes, 2017. "The economic effects of the elimination of taxation on investment: the case of ICMS in Brazil," Economics Bulletin, AccessEcon, vol. 37(2), pages 1055-1067.
    • Handle: RePEc:ebl:ecbull:eb-16-00861
    as

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    References listed on IDEAS

    as
    1. Fullerton, Don & Shoven, John B. & Whalley, John, 1983. "Replacing the U.S. income tax with a progressive consumption tax : A sequenced general equilibrium approach," Journal of Public Economics, Elsevier, vol. 20(1), pages 3-23, February.
    2. Junior, Roberto de Goes Ellery & Bugarin, Mirta N. S., 2003. "Previdência Social e Bem Estar no Brasil," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 57(1), January.
    3. Paes, Nelson Leitão & Bugarin, Mirta Noemi Sataka, 2006. "Reforma Tributária: impactos distributivos, sobre o bem-estar e a progressividade," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 60(1), January.
    4. Napoleão Luiz Costa da Silva & Marco Antônio Freitas Hollanda Cavalcanti, 2009. "Impactos de Políticas de Desoneração do Setor Produtivo: Uma Avaliação a Partir de um Modelo de Gerações Superpostas," Discussion Papers 1400, Instituto de Pesquisa Econômica Aplicada - IPEA.
    5. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
    6. Silva, Wilton Bernardino & Paes, Nelson Leitão & Ospina, Raydonal, 2014. "A Substituição da Contribuição Patronal para o Faturamento: Efeitos Macroeconômicos, sobre a Progressividade e Distribuição de Renda no Brasil," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 68(4), October.
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    More about this item

    Keywords

    Investment; Capital Goods; Taxation; General Equilibrium Model; Revenue; Welfare.;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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