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Formalizing microentrepreneurs through targeted tax systems: Evidence from Brazil

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  • Farias, Alison
  • Hsu Rocha, Roberto

Abstract

We study the effects of reducing formalization costs by exploiting the introduction of a simplified tax regime for microentrepreneurs in Brazil. Using novel administrative data and industry-level eligibility criteria, we show that a large reduction in entry and compliance costs significantly increased formal firm creation. Despite the increase in formalization, newly formal firms exhibit no growth or earnings gains. We then evaluate the new tax system’s fiscal consequences, showing that the expansion in social security coverage generated costs that exceed the additional tax revenue collected by 2.56 times. These costs arise as microentrepreneurs gain access to subsidized contributory benefits after registering through the system, highlighting the broader social value of bringing microentrepreneurs into the formal sector even in the absence of positive government net revenue or improvements in firm performance.

Suggested Citation

  • Farias, Alison & Hsu Rocha, Roberto, 2026. "Formalizing microentrepreneurs through targeted tax systems: Evidence from Brazil," Journal of Public Economics, Elsevier, vol. 259(C).
    • Handle: RePEc:eee:pubeco:v:259:y:2026:i:c:s0047272726001131
    DOI: 10.1016/j.jpubeco.2026.105677
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