Attack on bureaucracy may expand formal sector, says government


Source: Valor Econômico, 08/06/2004

By Ricardo Balthazar, from São Paulo

Bureaucratic difficulties that hinder the opening and functioning of small businesses have contributed more to the advancement of informality in the Brazilian economy than the increase in the tax burden in recent years, said economists and government officials who deal with the matter yesterday.

"The tax issue is not the main problem", affirmed the secretary of Economic Policy of the Ministry of Finance, Marcos Lisboa, during a debate promoted by the Brazilian Institute of Ethics in Competition (Etco). "The main obstacle is the sum of small obstacles that exist in the institutions and in the legislation for the operation of companies."

The World Bank estimates that in Brazil it takes 152 days to open a company, three times the world average. In a recent government-commissioned survey of 600 small business owners in São Paulo, the costs of dealing with public sector bureaucracy were identified as a bigger problem than taxes, said Lisbon.

Eight out of ten people who got a job in the past decade found employment only because they agreed to work without a formal license. More than half of employees in commerce, construction and the textile industry work without a formal contract. Companies that take advantage of not paying their taxes properly have gained ground in competition with cigarette and beverage manufacturers.

Politicians and big businessmen often point to the increase in the tax burden as the main explanation for the growth of this problem, but experts have been devoting increasing attention to other factors. A study by the consultancy McKinsey for the Etco Institute and presented in yesterday's debate suggests that regulatory aspects, bureaucratic barriers and very strict labor standards are much greater obstacles to the entry of several companies into the formal sector.

The government has been promoting studies to make the state agencies charged with registering new companies more agile and making them cooperate with agencies from other administrative spheres, such as the IRS. It also plans to change the way companies collect social security contributions, reducing the burden of this tax on the payroll and thus encouraging the hiring of more registered workers.

Another idea under debate in the government is to create mechanisms that make it easier to resolve conflicts in the courts. "More effective than investing in repression would be to create instruments for a dispute over intellectual property rights to be resolved quickly in the courts," said Daniel Goldberg, secretary of Economic Law at the Ministry of Justice.

The government has invested significant resources in suppressing contraband and tax evasion, but in general this effort has had little effect. People are lacking to police ports and borders, and fighting smugglers by chasing street vendors on city streets is like drying out ice. Another problem is the lack of cooperation between federal government agencies and between the Union and states in this area. “There is employee corporatism and a lot of political resistance,” said former Federal Revenue Secretary Everardo Maciel.

In assessing the McKinsey study, combating informality requires a diverse set of measures. In sectors where tax evasion is greater, such as civil construction and fuel distribution, incentives would be necessary for informal companies to enter the line. Repressive measures and increased enforcement would only work in activities where informality is still small.

In some sectors, a powerful incentive to enter the formal sector would be created if the country expanded its presence in international trade. "Industries that use a lot of informal labor, such as textiles, could change if they were encouraged to export more," suggested economist José Alexandre Scheinkman, from Princeton University, in the United States.

The McKinsey study is available here