The Effects of Size-Based Regulation on Small Firms: Evidence from Vat Threshold

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Effects of Size-Based Regulation on Small Firms: Evidence from VAT Threshold Terms of use: Documents in EconStor may AbstractThere is only limited evidence of how small firms respond to size-based regulations applied in various countries. We study this question by examining the value-added tax (VAT) threshold in Finland. We find sizable bunching of firms in the sales distribution just below the exemption threshold, implying that firms actively avoid VAT liability. We utilize variation in both the VAT rate and reporting requirements to provide compelling evidence that the response is caused by the compliance costs of VAT reporting rather than the level of the tax rate. In addition, we find that compliance costs hinder the growth of small firms.JEL-Codes: D220, H250, H320, L110.

VAT Notches, Voluntary Registration, and Bunching

“…It is worth noting that the bunching spike is not as sharp as in other bunching studies, in particular those studying firms' responses to notches (e.g., Almunia and Lopez-Rodriguez, 2018;Best and others, 2015;Harju, Matikka, and Rauhanen, 2016). One possible explanation is that firms that benefit from voluntary registration, do not respond in any way to the location of the threshold.…”

“…Onji (2009) documents the effects of the introduction of a VAT threshold in Japan, focusing on the incentives for a large firm to split in order to stay below the threshold. More recent papers, appearing after the first version of this paper was completed, document bunching of small firms at the VAT registration threshold in Finland (Harju, Matikka, and Rauhanen, 2016), as well as lack of bunching in response to the VAT threshold in Armenia (Asatryan and Peichl, 2016). 14 In particular, Harju, Matikka, and Rauhanen (2016) provide strong evidence of bunching below the VAT threshold in Finland, and argue that compliance costs are the main driver.…”

“…More recent papers, appearing after the first version of this paper was completed, document bunching of small firms at the VAT registration threshold in Finland (Harju, Matikka, and Rauhanen, 2016), as well as lack of bunching in response to the VAT threshold in Armenia (Asatryan and Peichl, 2016). 14 In particular, Harju, Matikka, and Rauhanen (2016) provide strong evidence of bunching below the VAT threshold in Finland, and argue that compliance costs are the main driver. 15 However, neither of these papers studies the determinants of voluntary registration in detail, nor do they develop a theoretical framework specific to the VAT.…”

Malas notches

“…First, there is a growing literature on the effect of VAT thresholds on firm behavior. Theoretical contributions include Keen and Mintz (2004), Kanbur and Keen (2014), and Liu and Lockwood (2015), and empirical studies include Liu and Lockwood (2015) and Harju et al (2016). The theoretical work of Kanbur, Keen, and Mintz focuses on the optimal threshold of the VAT, holding the rate of tax fixed, and is thus complementary to this paper, which characterizes the MEB of an increase in the rate, holding the threshold fixed.…”

Expanding access to administrative data: the case of tax authorities in Finland and the UK

“…They find that both offering moral reasons for tax payments (the importance of taxes for financing public goods and services) and increasing detection probabilities are effective tools for reducing tax evasion. Kosonen and Ropponen (2015) Devereux et al (2014), Kosonen (2015), Harju and Matikka (2016), Almunia et al (2017), Best and Kleven (2018), Guceri and Liu (2016), Harju et al (2017), Matikka (2018), Liu et al (2017), Harju et al (2018) and Kotakorpi and Laamanen (2016). tax code for firms in Finland.…”