Just having a super complicated tax system can wipe out a third of a country’s potential industrial output.
SSRN · March 18, 2026 · 6429605
The Takeaway
In Brazil, researchers found that the manufacturing sector operates at only 68% efficiency. Crucially, half of that massive waste is caused solely by tax distortions—not the high rates themselves, but the inconsistent and fragmented way taxes are applied differently across and within sectors.
From the abstract
This paper quantifies the impact of tax distortions on resource misallocation and aggregate productivity in Brazil’s manufacturing sector, a country characterized by one of the world’s most complex and fragmented tax systems. Using firm-level administrative data and building upon the framework of Hsieh and Klenow (2009), we distinguish between tax-specific and other distortions, decomposing tax distortions further into within-sector and between-sector components. We find that Brazil’s manufactur