# **2. The SIMPLES Program**<sup>**4**</sup>

The SIMPLES program was envisaged with the objective to simplify the tax system for SMEs. To be able to participate in the new program, microenterprises (self-employed) should have an annual revenue up to Brazilian real 120,000, while the annual revenue of small firms should be under Brazilian real 1.2 million.<sup>5</sup> The system combines six different federal taxes and social contributions into one single monthly-based rate: IRPJ (corporate income tax), PIS/PASEP (contribution to employee savings programs), CSLL (contribution on net profit), COFINS (contribution for financing the social security system), IPI (industrialized products tax), and employer social security contributions. Firms still had to pay other federal, state, and municipal taxes.

The reforms reduced the tax burden considerably. Rather than paying from 5 to 11 percent of gross revenues on taxes, under SIMPLES, micro firms would pay from 3 to 5 percent and small firms between 5.4 and 8.6 percent. In the beginning, only some sectors were covered by the new law. Eligible firms had to belong to one of the following sectors: retail trade, manufacturing, transportation, civil construction, and other services that do not require professionals with regulated occupations such as auditors, architects, dentists, engineers and others.

# **3. Reconciling the Fajnzylber el al. and Monteiro and Assunção Results**

A key difference between the two studies is the date considered for implementation of the program. According to Monteiro and Assunção (2012, p. 108): “ _Although we have only cross-sectional survey of firms in October 1997 [the Ecinf 1997], we introduce a time dimension in our analysis by considering firms created before and after the new legislation, which was December 1996_ .” Fajnzylber et al. considered November 1996 as cutoff instead. According to them (2011, p. 263): “ _In November, the Brazilian Government implemented a new simplified tax system for micro and small firms, the SIMPLES.”_ In other words, Monteiro and Assunção (2012) used December 1996, the month the law was approved in the Brazilian Congress, as cutoff. Fajnzylber et al. (2011) used November 1996 instead, the month the federal government drew up the provisional measure creating the new program.<sup>6</sup> Since ECINF 1997 indicates the number of months a firm is in business, Monteiro and Assunção (2012) specify their DID regression to obtain estimates comparing outcomes of eligible and ineligibles firms created before and after December 1996. Their estimates include firms from 0 to 20 months old. That is, firms that started business between February 1996 and October 1997.

On the other hand, Fajnzylber et al. (2011) use an RD design to compare eligible firms created after November 1996 with eligible firms that were in business already. Like Monteiro and Assunção, Fajnzylber et al. (2011) also employed a DID approach, but they used a different sample of firms and gave more weight to observations close to the cutoff point.

> 4 This section is brief summary of section 2 in Monteiro and Assunção (2012).

> 5 The exchange rate at that time was 1.04 Brazilian Real per 1 U.S. dollar. See www.bacen.gov.br

> 6 Although the provisional measure gave firms the right to formalize under the simplified tax program, Congress would still have to approve it to turn it into a law.

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