# 2.3 Application of the fiscal incidence analysis 18F<sup>19</sup>

## _Taxes and contributions_

**_Direct taxes and social security contributions._** The approach to estimate personal income taxes is explained in detail in World Bank (2020). In summary, the method consists in a simulation approach that builds tax units based on gender, age, school enrollment, income, and relation to the household head to identify taxable income. The tax regime is estimated according to individuals' status in the labor market, which fundamentally depends on labor force participation, employment, type of business and type of employment contract if working. Therefore, the estimated taxable income is adjusted according to the inferred tax regime, tax deductions, and statutory rates. For personal income taxes, formal workers in PNAD-C were identified and classified into one of the following four categories: (i) private sector, (ii) public sector, (iii) military, or (iv) self-employed and business owners. The latter were classified as paying taxes as (i) an individual microentrepreneur ( _Microempreendedor Individual_ , MEI); or (ii) a firm registered under the SIMPLES Nacional regime; (iii) a firm registered under a non-simplified tax regime (i.e., we refer to such firms as “PJ regular”); or (iv) a self-employed worker (see the details in World Bank, 2020, pp. 5-7). 19F<sup>20</sup> Informal workers are identified if they are non-registered salary workers (no _carteira assinada_ ), or if they are employers or self-employed that do not have either a business registration (CNPJ) nor pay the social security contribution (INSS). Informal workers are considered to not pay personal income taxes. For social security, we estimate individuals’ pensions contributions and employer contributions (FGTS and Cota patronal, see the details in World Bank, 2020, pp. 7-9). Informal workers who reported to contribute to pensions are estimated to pay through the voluntary regime.

To estimate IPTU/ITR, we use data from POF 2017/18 to fit a regression that explains the behavior of the sum of IPTU and ITR as a function of disposable income, area of residence (urban or rural), Brazilian state, 19 There are some differences in terms of the CEQ approach between this paper and that from Higgins and Pereira (2014) for Brazil relative to 2008/2009. First, Higgins and Pereira (2014) use survey responses at face value, as in Silveira and Palomo (2023), while our paper models and simulates direct taxes. Second, our study has a broader coverage of direct transfers. Third, Higgins and Pereira (2014) account for electricity subsidies, while we do not. Fourth, the health imputation figures for 2009 were made using the health module of PNAD 2008, while we use PNS 2019. The authors calculated the average benefit received per health visit facility visit and then imputed it to households that reported attending a public health facility. The estimates from Higgins and Pereira (2014) were calculated by state. In 2019, estimates consider the age population composition using PNS, so both are valid but with a different emphasis on group differences (geographical vs. age group). Finally, education estimates in 2019 used per-pupil INEP estimates, but for the year 2018. For 2009, the authors used state-level estimates, one value for all education except tertiary and another for tertiary with data from national accounts. So, the 2009 estimates could better reflect geographic differences, while ours may probably better capture differences in educational per capita benefits. Nonetheless, there is suggestive evidence that differences in the results of this work and Higgins and Pereira (2014) may in fact reflect the actual changes of the fiscal system. Higgins and Pereira (2014) found that Brazil 2009’s fiscal system was reducing poverty and inequality until disposable income, but results for poverty are reverted when indirect taxes were accounted for. Meanwhile, Silveira and Palomo (2023) use POF 2017/2018 and find that indirect taxes have a regressive effect, but that this effect is smaller than that from POF 2002/2003. This smaller effect is in line with our finding of marginal positive impacts on poverty of fiscal policies.

20 SIMPLES Nacional is the Brazil’s simplified tax regime for small and micro firms, which also encompasses a subregime for nanoentrepreneurs named Microempreendedor Individual (MEI). Firms whose profits are larger than a given threshold are not allowed to opt in for the simplified tax regimes such as SIMPLES Nacional and MEI, and these firms were classified under the category “PJ Regular” to account for the fact that they typically face a higher tax burden.

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