# rates.<sup>32</sup>

Piza (2018) evaluates the SIMPLES program with the same data sets used in both studies and shows that the large eects of the program on formalization rates found previously were likely confounded by measurement error in the assignment variable and seasonal shocks that aected more intensely the sectors that the reform initially targeted. He then suggests two alternative empirical strategies to deal with the identication problems present in the two studies. The new estimates suggest that SIMPLES did not increase formalization rates of micro- and small rms. The author then argues that given the expansion of the program over the years, it would be important to evaluate SIMPLES in its current format so that the potential eects of the program on tax collection through higher formalization rates of micro- and small businesses could be confronted with its large scal costs.<sup>33</sup> Rocha et al. (2018) estimate the impact of another large-scale formalization program implemented in Brazil, the Individual Micro-Entrepreneur Program (Programa do Microempreendedor Individual, MEI). Introduced in 2009, the program targeted entrepreneurs with at most one employee, and was designed to reduce both registration and ongoing costs of remaining formal, by reducing monthly taxes and red tape. In its rst phase, the program eliminated entry costs for eligible entrepreneurs, and in the second phase it substantially reduced the tax burden. The authors exploit this staggered implementation to assess the eects of reducing the tax burden faced by small formal rms. They nd that the rst phase had no eect on formalization, while the second led to an increase of around 11 percent. This result is entirely driven by the formalization of existing informal rms and not by the creation of new formal businesses, nor by greater survival among formal rms. However, the authors argue that these interventions were not cost-eective, since the program led to net losses in tax revenues. Taken together, these results indicate that reducing the costs of entering the formal sector had very limited or no formalization eects in Brazil, while reducing the ongoing costs of formality was more eective, but the eects were not large and the policies do not seem to be cost eective.<sup>34</sup> This raises the question of why reducing the costs of formality have such limited eects.

As discussed previously, Ulyssea (2018) nds that only 9.3 percent of informal rms in Brazil are potentially productive rms hindered by high regulatory costs. The informal

> 32Monteiro (2016) shows that SIMPLES is not cost-eective. Even in the retail sector the increase in revenues that results from formalization does not compensate for the revenue loss of already formal micro and small rms that have a reduction in their tax burden.

> 33Corseuil and Moura (2016) evaluated the eect of SIMPLES on several rm performance indicators in the manufacturing sector for several years, including the SIMPLES Nacional in 2007. They found no eect of SIMPLES on rm performance.

> 34See Ulyssea (2020b) for a discussion of the evidence on formalization policies in Brazil and other countries.

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