Fundação Getulio Vargas’ Brazilian School of Public and Business Administration (FGV EBAPE) has just published a study titled “Billions down the rabbit hole? Evaluating tax amnesties as public policies,” which analyzes the effectiveness of the government’s Tax Recovery Program (REFIS). This federal government tax amnesty program provides significant tax breaks and it is frequently used in Brazil, especially in periods of economic crisis. The study found that the 2014 edition of REFIS had a negative impact in terms of maintaining jobs at the companies involved, which on average lost 6% more workers than non-participating companies between 2015 and 2017.

According to the author, Natalia Ferreira Rodrigues, who is doing a doctorate at FGV EBAPE and previously did a professional master’s in public administration at the school, the study’s findings may be used to formulate more appropriate policies going forward. She mentions Law 13,988 of 2020, which governs small claims, as a positive example. She also believes that her study could contribute to the transparent use of tax benefits, to ensure that such policies serve the public interest.

“This research sheds light on little publicized fiscal policies that commit tens of billions of dollars of public money. We have strong evidence of the negative effects of tax amnesties and their dangers in general. After three years, the beneficiaries’ workforces shrank by 6% in comparison with non-beneficiaries, which indicates a strong negative effect of REFIS,” says Rodrigues, who carried out the study in collaboration with researcher Diego de Faveri and under the guidance of professor and researcher Gregory Michener, both at FGV EBAPE.

The first part of the research analyzed REFIS using a public policy cycle model, encompassing the stages of scheduling, formulation, implementation and monitoring. The second part assessed REFIS’ impact in terms of creating or maintaining jobs, which is one of the program’s intended goals. Examining data from approximately 10,000 companies, the researchers used the differences-in-differences and matching methods to create a quasi-experiment to assess the impact of REFIS on job creation and maintenance at companies that received tax benefits.

Tax amnesties can be considered to be one of several types of “tax expenses,” alongside other incentives and benefits such as subsidies and tax exemptions, which result in lower revenue for the government. The purpose of amnesties is to support businesses in difficult times by alleviating tax debts. The problem, according to the researchers, is that tax amnesties can also generate moral hazard such as the pursuit of income and other deviations. It is also worth considering opportunity costs.

“The loss of income is equivalent to a loss of direct investment in education and other essential services. Therefore, we question the validity of tax amnesties as public policies. When we perform this analysis from a policy cycle perspective, the evidence points to a deficit of transparency due to the legal process in the formulation, adoption, implementation and oversight of the administration of tax amnesties in Brazil. In addition, the results show the negative effects of tax amnesties on job creation or maintenance,” Michener explains.

The study’s findings cast doubt on the public value of these policies, in terms of both return on public investment and governance. These results echo much of the literature, which recommends that governments rethink the use of tax amnesties and other forms of tax spending.

To find out more about the study, click here.