Misallocations of factors of production have the potential to explain a large portion of cross-country differences in productivity (Hsieh and Klenow (2009)). Yet, empirical evidence relating actual differences in firms' productivity to observable policy distortions has been scarce. In this paper I exploit a fiscal reform in Brazil to provide direct empirical evidence of the distortions created by turnover taxes. Turnover taxes are business taxes that, unlike Value Added Taxes, do not allow to deduct the cost of intermediate inputs from the tax base, and that for this reason hit disproportionately industries whose inputs account for a large share of the final value of production. Using a difference-in-difference approach, I show that after the reform sectors that rely more on intermediate inputs grow faster in employment, revenue and industrial sales. Firms in the same sectors that were not affected by the reform do not show similar patterns of growth during the period. These results have relevant policy implications, as turnover taxes are very common around the world.
Caprettini, B. Taxes, Misallocations and Productivity. (2014) 21 pp.