Do firms respond to presumptive tax credits? Evidence from Brazilian manufacturing

Abstract

This paper examines the economic effects of a large presumptive tax credit reform targeting the textile and clothing sectors in São Paulo, Brazil. Using detailed administrative tax records matched with labor market data, we analyze the behavioral responses of textile and clothing firms compared to a control group of firms in the closely related, but not yet treated, footwear industry. Employing a dynamic difference-in-differences design, we find transitory increases in reported sales and input purchases: both outcomes rise in the first year after implementation, with only purchases remaining elevated into the second year. We find no significant changes in tax collection or the number of active firms in the benefited sectors. n evidence from a synthetic control approach suggests modest, though imprecisely estimated, gains in average wages. Our findings indicate that the policy produced only short-lived economic effects without leading to positive fiscal effects.