Linguistics

Philosophy

Exploit

Microeconomics

Materials science

Panel data

Computer security

Formality

Economics

Computer science

Business

Elasticity (physics)

Public economics

Economies of scale

Econometrics

Composite material

Revenue

Industrial organization

Finance

Tax revenue

Journal of Development Economics

We exploit a unique, large-scale formalization program in Brazil to estimate the effects of reducing the costs of formality on firm formalization. We rely on both firm-level administrative data and individual panel data to show that reducing taxes once registration costs have already been eliminated reduces firm informality. This effect comes from the formalization of existing informal firms, and not from the creation of new formal businesses nor greater formal firm survival. The implied formalization elasticity is otherwise low, and our cost-benefit analysis indicates that the program led to net losses in tax revenues.

Do lower taxes reduce informality? Evidence from Brazil