A Brazilian government programme that aims to get the self-employed to formalise, could leave an over $150-billion hole in the fiscus over the next 40 years, says a new study.
The study was released earlier this month by Ipea, a Brazilian state research institute.
The government’s Microempreendedor Individual (Individual micro entrepreneurs) programme, which has been in operation since 2009 allows one or two-man firms to register as a simplified company type.
The idea is to help more of the millions of those who operate in the informal sector as street traders and other types of informal work to get into the tax system. The main draw card is that registration allows them and one other person they employ, to be covered by the government’s social security system.
Self-employed persons with an income of less than 81,000 reals per year can qualify. As a social security payment they need contribute only five percent of the minimum salary, which in 2018 will be 954 reals
By December last year about 7.7 million beneficiaries had signed up to the tax type.
But the study's author Rogerio Nagamine Costanzi points out that the tax amounts to a poorly aligned government subsidy.
Participants contribute next to nothing (just five percent of future benefits), yet upon retirement are able to draw on thousands of reals in benefits.
This estimates the author is expected to leave an accumulated 464.7 billion to 608 billion reals ($150bn to $192bn) deficit between 2015 and 2060.
Costaniz gives the example of a woman who after completing 15 years under the tax form retires at 60 years old. She has an average life expectancy of an additional almost 24 years. While she had put in 6,900 reals in contributions, she will get 135,600 reals of benefits.
The country already has one of the most generous pension systems in the world, but unsustainable benefits have seen government debt explode in recent years. A top minister this week said the state's plan to reform pensions will be put to Congress next month.
In addition the Ipea study points out that most of the beneficiaries of the Microempreender Individual tax are not from the lowest tax brackets – the average monthly income of such taxpayers (2,532 reals in 2014) is above the average monthly income for the labour population (1,453 reals).
Furthermore, 16.2% of MEI beneficiaries have completed college, above the average for the private sector of 14.8% or those that are not subscribed in the programme (10.2%).
It suggests says Costanzi that many persons using it are perhaps not the wholly self-employed workers that the programme aims to benefit.
It’s not the first study to show up the ability of the tax type to reduce informality in Brazil.
Second study to suggest losses
A study released in February last year by Rudi Rocha, Gabriel Ulyssea and Laísa Rachter also indicates that the programme led to net losses in tax revenues and had few benefit to lowering informality in Brazil (see also this earlier post).
The study found that the main restriction to formalisation are not entry costs, but the costs of remaining formal.
“In terms of cost-effectiveness, the formalisation effects from the tax reduction are too modest to generate a net gain in terms of tax revenues and our back of the envelope calculation suggests a net monthly loss in tax revenues,” said the authors.
Brazil's rate of informal employment began to recede at the beginning of this century, notes the International Labour Organisation (ILO) in a 2014 report. It fell from 41.7% in 2001 to 30.2% in 2011.
The ILO however attributes the decline in informal employment to better policies which encouraged a more conducive business environment for micro firms (including lower taxation under a 2006 tax, Simples Nacional).
These measures formed part of a broader policy framework favouring economic growth, income distribution and job creation, it argues
It's then difficult to say that offering better retirement benefits for self-employed has increased formalisation. Brazil then, should focus more on lowering its gargantuan bureaucracy that holds back business (the World Bank ranks it 125 out of 190 countries for ease of doing business).
Reducing the number of forms, licenses and processing times may make entrepreneurs more confident to register for tax. This could prove vital, as the country recovers from one of its worst ever recessions.
Timm is a South African who writes on small business. Download the Ipea's study here. Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a