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Do lower taxes reduce the size of the firms? Evidence from micro-entrepreneurs in Brazil

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  • Nascimento, Marcos
  • Mattos, Enlinson

Abstract

This paper explores unique administrative data on the universe of firms under a simplified tax regime (SN) in a representative Brazilian state. We investigate micro-entrepreneurs revenue response to a reduced tax rate, up to 3.3 p.p. for smaller firms. Our preferred results show an excess mass of 735 (295%) firms bunching at the tax reduction eligibility threshold, resulting in an estimated elasticity of business income with respect to the net-of-taxes of 0.015. Firms whose revenues are close to the thresholds are associated with a larger probability to report positive revenue in the subsequent year (1.8%), however, most of these firms are no longer active.

Suggested Citation

  • Nascimento, Marcos & Mattos, Enlinson, 2023. "Do lower taxes reduce the size of the firms? Evidence from micro-entrepreneurs in Brazil," Economics Letters, Elsevier, vol. 226(C).
    • Handle: RePEc:eee:ecolet:v:226:y:2023:i:c:s0165176523000939
    DOI: 10.1016/j.econlet.2023.111068
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