Tax Compliance Costs and Employment in SMEs: Evidence from a Size-dependent Policy in Brazil

Small and medium-sized enterprises play an important role on economic development, they employ a great share of the labor force and may even trigger increases of aggregate productivity. In this paper we evaluate how their... [ view full abstract ]

Small and medium-sized enterprises play an important role on economic development, they employ a great share of the labor force and may even trigger increases of aggregate productivity. In this paper we evaluate how their growth is affected by reductions on tax compliance costs. More specifically, we infer the causal effect of simplifying bureaucracy and reducing the tax burden on firms employment decisions in Brazil, one of the worst countries in the world to operate in terms of business taxes. Our identification strategy exploits the discontinuity among firms next to a eligibility threshold associated with the Simples Nacional program. Using firm-level data from the Annual Industrial Survey (PIA), we provide compiling evidence that companies participating in the program reduced their industrial operating cost by 23%, increased job creation in 21.5% and payroll in 25.18%.