The Potential Effects Of The Competitive Tax Regime For Clothing And Apparel: An Application Of Vector Autoregression (Var)

Brazil is one of the few countries in the West to have the presence of all the links of the textile and apparel supply chain in its own territory. The country is the fifth largest textile producer and the fourth largest clothing producer in the world. Unlike China, which is a leader in both segments, the focus of national production is the fulfillment of domestic demand. The stage of apparel, in particular, presents a large number of small companies, with a significant level of informality and loss of productivity due to the absence of scale gains. Much of this situation comes from the characteristics of the tax regime prevailing in the sector. The purpose of this paper is to estimate the potential effects of a proposal for tax reform in the apparel sector. Its name is Competitive Tax Regime for Clothing Making (RTCC). The purpose is to simplify procedures and reduce the federal tax burden incident in companies from the apparel sector to 5% of gross revenue, in a monthly single collection procedure and with voluntary adherence. In order to evaluate and simulate the impacts of the proposal, we adopted econometric estimation by vector autoregressive model (VAR) and simulation by an input-product matrix of 68 sectors and 128 products, for a time horizon from 2018 to 2030. As a result, we obtained that the change from the current tax regime to the RTCC would result in progressive increases in production and employment, following the gradual tax reduction, achieved from the move to the RTCC. Total taxation on both sectors would also show growth, despite the gradual reduction in the tax burden, as it increases production and employment, raising the tax base.