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Francois Gerard, Columbia Print
Friday, 15 December 2017, 12:15 - 13:15

Francois Gerard, Columbia University

Tax Systems and Inter-Firm Trade: Evidence from the VAT in Brazil

Abstract : The design of tax systems often generates a network of taxpayers where the same transaction can be part of a tax liability for one taxpayer, and a source of deductions to another taxpayer. In modern tax systems such networks are pervasive, and have been shown to be an important tool for enforcement as it generates systematic third-party reporting. Although these links between taxpayers are common across different tax instruments, little is known about how it affects the behavior of taxpayers and how these behaviors affect their network. In this paper, we contribute to filling this gap by exploiting administrative data from Sao Paulo, Brazil to study a Value Added Tax (VAT) system, where the inter-firm trade is a first-order feature of the tax. We exploit VAT exemptions and a reform in the exemption eligibility to document a number of new empirical patterns on the relationship between the tax system and inter-firm trade. Our results are consistent with production distortions: we find (partial) segmentation in the network between VAT firms and exempt firms. Moreover, we document how firms’ incentives to be in the VAT system is affected by their own profile and the characteristics of their network. Our findings are particularly relevant for the debate on tax systems and informality in developing countries, where a number of informal firms are de facto exempt from taxes could face similar production incentives as formal firms that are de jure exempt.

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