Out of the Shadows? Revisiting the impact of the Brazilian SIMPLES program on firms' formalization rates

A recent survey of programs aimed at helping small firms to formalize indicates that most programs fail at achieving this goal. One study reported that the Brazilian tax simplification program, SIMPLES, had a large effect on firms' formalization rates. Using the same data set, another study concluded that the program had a limited effect on formalization rates. The aim of this paper is twofold: (a) to provide a thorough discussion of methodological issues that escaped the two previous evaluations of SIMPLES and (b) to suggest two alternative empirical strategies to deal with the identification problems present in the two studies. The main finding of this paper suggests that the program did not affect formalization rates. The large effects of the program on formalization rates found previously were likely confounded by measurement error in the assignment variable and seasonal shocks that affected more intensely the sectors that the reform initially targeted.