Studies identify improvements in tax collection generated by innovation programs

Is it possible to measure the benefits of innovative tax collection programs such as the implementation of electronic tax invoices in Brazil? According to studies carried out by researchers at FGV Cities, the answer is yes. Using statistical and econometric methods, it is possible to assess the economic impacts of these policies. Three studies analyzing innovations in tax collection in Brazil were discussed in a webinar jointly held by FGV Cities, the Center for Innovation in Urban Policies at Fundação Getulio Vargas’ Sao Paulo School of Business Administration (FGV EAESP) and the Inter-American Development Bank on November 7

This topic, which is high on the Brazilian public agenda due to the tax reform currently under way in Congress, was discussed by experts, who highlighted the opportunity that the digitalization process represents in terms of innovation and simplification in tax collection. “Opportunities like this, in which simple innovations can generate an increase in tax revenue, cannot be wasted. Certainly, the Inter-American Development Bank’s funding to support innovation has been very important, especially for municipalities,” said the director of FGV Cities, Ciro Biderman.

The online seminar featured three panel discussions, beginning with “Innovations in Tax Collection in Brazil: From Digitalization to Data Science.” The speaker was researcher George Avelino of FGV’s Center of Politics and Economics of the Public Sector (FGV CEPESP), the moderator was Lycia Lima of FGV EESP, and comments were provided by Vanessa Rahal of Insper, a higher education institute in Sao Paulo. The next session, moderated by Maria Cristina MacDowell of the Inter-American Development Bank, looked at “How to Measure Gains from Innovations in the Tax System: The Case of Brazilian States.” The presenter was Ciro Biderman of FGV Cities and there were comments from Enlinson Matos of FGV CEPESP. The last panel dealt with the theme “Impacts of PROFISCO and PNAFM III on Tax Revenue.” The presenters were André Martínez Fritscher and Maria Cristina MacDowell of the Inter-American Development Bank. Comments were made by Ricardo de Souza Moreira of the Brazilian Federal Revenue Service and the moderator was Isaias Coelho of the FGV Sao Paulo Law School.

Increased transparency and efficiency

The implementation of electronic tax invoices in Brazil, digitizing and simplifying tax compliance, has boosted tax revenue by around 10%, according to a study conducted by FGV researchers, with funding from the Inter-American Development Bank. This study used information from state revenue agencies, the Federal Revenue Service and the Annual Social Information Database (RAIS), which focuses on the labor market. The empirical strategy explored was differences in differences analysis, which consisted of comparing states and sectors that had not yet implemented electronic tax invoices with those that had already done so.

According to the results, presented by George Avelino, a researcher at FGV CEPESP, although different states have moved at different speeds since the first programs were implemented in 2007, digitalization has held down costs and made tax collection more efficient by encouraging greater cooperation from taxpayers.

“The digitalization of tax collection should increase the transparency of the process, or at least its legitimacy, given the aspects common to all taxpayers, reinforcing cooperation,” said the political scientist. According to him, tax collection is a central issue for political economy, as it is a basic precondition for the existence of the state itself.

The session’s debater, researcher Vanessa Rahal, emphasized the importance of this topic in the tax policy literature. According to her, specific examples of information cross-checking would be hard to define as compliance programs by design, due to the difficulty of gauging what actually caused the increase in revenue. “I don’t know if in this Herculean work you’ve done with the data it’s possible to introduce a variable or to select only the group of taxpayers who received a notice to self-correct possible errors or omissions in tax filings or payments. But if we look at the whole group of taxpayers, it’s possible that we saw an increase in tax revenue due to taxpayers’ fear of being found guilty of irregularities, not necessarily because of the opportunity to self-correct issues,” she said.

Brazil is pioneer in digitalization

According to Biderman, revenue agencies are an exception when it comes to innovation in the public sector. The researcher highlighted Brazil’s pioneering work to digitalize tax documents. He argued that the self-correction model, which allows taxpayers to voluntarily rectify any errors in tax returns, avoiding fines and lawsuits, has played a key role.

As a public policy suggestion, he defended the implementation of compliance programs, due to their favorable cost-benefit ratio. “We hope that through simplification, self-correction programs will no longer be so relevant,” he said.

Researcher Enlinson Matos summarized the study, pointing out that it was the first evaluation of this type of program in Brazil. “This kind of study needs to be sponsored, because nobody knows the effect and we need to test the variables we have at hand,” he said.

Modernization and administrative improvements

Modernizing tax collection systems has been a challenge for state and especially municipal administrations. How can programs such as the third edition of the National Program to Support the Administrative and Fiscal Management of Brazilian Municipalities (PNAFM III) and credit initiatives such as the Program to Support the Management of Brazil’s Tax Authorities (PROFISCO) improve fiscal management? Also using the differences in differences analysis method, two other studies evaluated the impact of this type of tool on tax revenue. The two programs, both funded by the Inter-American Development Bank, were aimed at promoting administrative, fiscal and financial modernization. The first was aimed at municipalities while the second was designed for states and the Federal District.

According to research discussed in the webinar, the implementation of PNAFM III boosted municipal governments’ tax revenue by between 17.9% and 23.2%, in line with the financial disbursement limit of 25% and 50%. André Martínez Fritscher, senior specialist in the Inter-American Development Bank’s Fiscal Management Division, presented a study assessing the impact of PNAFM III products on municipal governments’ revenues.

“We found this positive association even in the short term. This result can be attributed to the implementation of products aimed at increasing the efficiency and effectiveness of tax administration, integrating spatial control into tax management and improving the quality of tax information,” Fritscher explained.

The municipalities supported by PNAFM III tended to be more populous, economically developed and focused on services than average. One third were state capitals. In view of this disparity, the study built a counterfactual group for comparison between 2014 and 2021, considering the presence and absence of the program.

Ricardo de Souza Moreira, the Federal Revenue Service’s general inspection coordinator, was the session’s debater. He pointed out that the study’s methodology highlighted the low autonomy of municipalities, noting that only 30 of Brazil’s 5,568 municipalities account for 60% of the country’s ISS (municipal service tax) revenue.

Improvements in state management

In the case of the PROFISCO I study, the program’s implementation was found to have boosted state governments’ total revenues by 11.7%. According to Maria Cristina MacDowell, principal specialist in fiscal management at the Inter-American Development Bank, PROFISCO I had positive and sustainable effects on tax revenue and labor market variables, including a 2.6% increase in the formal economy’s share of employment and a 3.4% increase in pay. “All this work we did was fundamental for the Inter-American Development Bank and the Brazilian government to request a second round of modernization for the states, through PROFISCO II, currently under way,” she said.

PROFISCO I covered 22 of Brazil’s 26 states, plus the Federal District. One of its conditions was the implementation of electronic tax invoices. According to MacDowell, the program stands out for its flexibility, with projects designed based on the fiscal and economic reality of each state.

In Ricardo Moreira’s opinion, the digital transformation that the country has undergone in terms of tax collection has enabled “compliance by design.” He brought up the example of pre-filled declarations as an effort by the Federal Revenue Service to simplify and exploit instruments to reduce noncompliance, as part of a tax reform trend.

“In the present tax reform, the intention is that, when carrying out a commercial or industrial operation, the taxpayer only has to worry about filling out tax documents and the rest is up to the tax authorities. Calculations, the provision of payment slips and due dates are part of compliance by design. These documents can also help us with another issue, self-correction, as was commented on during the lectures,” said Moreira.