IDEAS home Printed from https://ideas.repec.org/a/eee/pubeco/v173y2019icp139-164.html
   My bibliography  Save this article

Compliance costs vs. tax incentives: Why do entrepreneurs respond to size-based regulations?

Author

Listed:
  • Harju, Jarkko
  • Matikka, Tuomas
  • Rauhanen, Timo

Abstract

This paper studies the mechanisms behind the responses of entrepreneurs to size-dependent tax regulation. We exploit the value-added tax (VAT) exemption threshold in Finland. Both tax incentives (remitted VAT) and compliance costs (frequent filing of VAT reports, understanding the VAT system, etc.) change at this sales-based threshold in a discontinuous manner. We utilize variation in both the VAT rate and reporting requirements to show that the large observed sales response is caused by the compliance costs of VAT rather than the level of the VAT rate, highlighting the key role of compliance costs among small firms and entrepreneurs.

Suggested Citation

  • Harju, Jarkko & Matikka, Tuomas & Rauhanen, Timo, 2019. "Compliance costs vs. tax incentives: Why do entrepreneurs respond to size-based regulations?," Journal of Public Economics, Elsevier, vol. 173(C), pages 139-164.
    • Handle: RePEc:eee:pubeco:v:173:y:2019:i:c:p:139-164
    DOI: 10.1016/j.jpubeco.2019.02.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0047272719300210
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpubeco.2019.02.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Luis Garicano & Claire Lelarge & John Van Reenen, 2016. "Firm Size Distortions and the Productivity Distribution: Evidence from France," American Economic Review, American Economic Association, vol. 106(11), pages 3439-3479, November.
    2. Dora Benedek & Ruud A. De Mooij & Michael Keen & Philippe Wingender, 2015. "Estimating VAT Pass Through," CESifo Working Paper Series 5531, CESifo.
    3. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 749-804.
    4. Alexander M. Gelber & Damon Jones & Daniel W. Sacks, 2013. "Earnings Adjustment Frictions: Evidence From Social Security Earnings Test," Working Papers 13-50, Center for Economic Studies, U.S. Census Bureau.
    5. Sebastian Calonico & Matias D. Cattaneo & Rocio Titiunik, 2014. "Robust Nonparametric Confidence Intervals for Regression‐Discontinuity Designs," Econometrica, Econometric Society, vol. 82, pages 2295-2326, November.
    6. François Gourio & Nicolas Roys, 2014. "Size‐dependent regulations, firm size distribution, and reallocation," Quantitative Economics, Econometric Society, vol. 5, pages 377-416, July.
    7. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    8. Miguel Almunia & David Lopez-Rodriguez, 2018. "Under the Radar: The Effects of Monitoring Firms on Tax Compliance," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 1-38, February.
    9. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2006. "The marginal cost of public funds: Hours of work versus labor force participation," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1955-1973, November.
    10. Asatryan, Zareh & Peichl, Andreas, 2016. "Responses of firms to tax, administrative and accounting rules: Evidence from Armenia," ZEW Discussion Papers 16-065, ZEW - Leibniz Centre for European Economic Research.
    11. Michael Carlos Best & Anne Brockmeyer & Henrik Jacobsen Kleven & Johannes Spinnewijn & Mazhar Waseem, 2015. "Production versus Revenue Efficiency with Limited Tax Capacity: Theory and Evidence from Pakistan," Journal of Political Economy, University of Chicago Press, vol. 123(6), pages 1311-1355.
    12. Philippe Aghion & Maxime Gravoueille & Matthieu Lequien & Stefanie Stantcheva, 2017. "Tax Simplicity or Simplicity of Evasion? Evidence from Self-Employment Taxes in France," NBER Working Papers 24049, National Bureau of Economic Research, Inc.
    13. Ravi Kanbur & Michael Keen, 2014. "Thresholds, informality, and partitions of compliance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 536-559, August.
    14. Aghion, Philippe & Akcigit, Ufuk & Lequien, Matthieu & Stantcheva, Stefanie, 2017. "Tax simplicity and heterogeneous learning," LSE Research Online Documents on Economics 86613, London School of Economics and Political Science, LSE Library.
    15. Keen, Michael & Mintz, Jack, 2004. "The optimal threshold for a value-added tax," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 559-576, March.
    16. Harju, Jarkko & Kosonen, Tuomas & Skans, Oskar Nordström, 2018. "Firm types, price-setting strategies, and consumption-tax incidence," Journal of Public Economics, Elsevier, vol. 165(C), pages 48-72.
    17. Onji, Kazuki, 2009. "The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 766-775, June.
    18. Carbonnier, Clement, 2007. "Who pays sales taxes? Evidence from French VAT reforms, 1987-1999," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1219-1229, June.
    19. Youssef Benzarti & Dorian Carloni & Jarkko Harju & Tuomas Kosonen, 2020. "What Goes Up May Not Come Down: Asymmetric Incidence of Value-Added Taxes," Journal of Political Economy, University of Chicago Press, vol. 128(12), pages 4438-4474.
    20. Lawrence F. Katz & Alan B. Krueger, 2016. "The Rise and Nature of Alternative Work Arrangements in the United States, 1995-2015," Working Papers 603, Princeton University, Department of Economics, Industrial Relations Section..
    21. (IFS), Institute for Fiscal Studies (ed.), 2010. "Dimensions of Tax Design: The Mirrlees Review," OUP Catalogue, Oxford University Press, number 9780199553754.
    22. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 669-723.
    23. Michael P. Devereux & Li Liu & Simon Loretz, 2014. "The Elasticity of Corporate Taxable Income: New Evidence from UK Tax Records," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 19-53, May.
    24. Kosonen, Tuomas, 2015. "More and cheaper haircuts after VAT cut? On the efficiency and incidence of service sector consumption taxes," Journal of Public Economics, Elsevier, vol. 131(C), pages 87-100.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jarkko Harju & Tuomas Matikka & Timo Rauhanen, 2016. "The Effects of Size-Based Regulation on Small Firms: Evidence from VAT Threshold," CESifo Working Paper Series 6115, CESifo.
    2. Asatryan, Zareh & Peichl, Andreas, 2016. "Responses of firms to tax, administrative and accounting rules: Evidence from Armenia," ZEW Discussion Papers 16-065, ZEW - Leibniz Centre for European Economic Research.
    3. Drahomir Klimsa & Robert Ullmann, 2023. "Threshold-dependent tax enforcement and the size distribution of firms: evidence from Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(4), pages 1002-1035, August.
    4. Li Liu & Ben Lockwood & Miguel Almunia & Eddy H. F. Tam, 2021. "VAT Notches, Voluntary Registration, and Bunching: Theory and U.K. Evidence," The Review of Economics and Statistics, MIT Press, vol. 103(1), pages 151-164, March.
    5. Asatryan, Zareh & Gomtsyan, David, 2020. "The incidence of VAT evasion," ZEW Discussion Papers 20-027, ZEW - Leibniz Centre for European Economic Research.
    6. Miguel Almunia & David Lopez-Rodriguez, 2018. "Under the Radar: The Effects of Monitoring Firms on Tax Compliance," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 1-38, February.
    7. Kaoru Hosono & Masaki Hotei & Daisuke Miyakawa, 2024. "The interaction of a size-dependent tax policy and financial frictions: evidence from a tax reform in Japan," Small Business Economics, Springer, vol. 63(3), pages 1293-1320, October.
    8. Li Liu & Ben Lockwood, 2015. "VAT notches," Working Papers 1506, Oxford University Centre for Business Taxation.
    9. Philippe Aghion & Maxime Gravoueille & Matthieu Lequien & Stefanie Stantcheva, 2017. "Tax Simplicity or Simplicity of Evasion? Evidence from Self-Employment Taxes in France," NBER Working Papers 24049, National Bureau of Economic Research, Inc.
    10. He, Daixin & Peng, Langchuan & Wang, Xiaxin, 2021. "Understanding the elasticity of taxable income: A tale of two approaches," Journal of Public Economics, Elsevier, vol. 197(C).
    11. Irene Di Marzio & Sauro Mocetti & Enrico Rubolino, 2024. "The market externalities of tax evasion," Temi di discussione (Economic working papers) 1467, Bank of Italy, Economic Research and International Relations Area.
    12. Bohne, Albrecht & Nimczik, Jan Sebastian, 2018. "Information Frictions and Learning Dynamics: Evidence from Tax Avoidance in Ecuador," IZA Discussion Papers 11536, Institute of Labor Economics (IZA).
    13. Marx Benjamin M., 2024. "Dynamic Bunching Estimation with Panel Data," Journal of Econometric Methods, De Gruyter, vol. 13(2), pages 225-249.
    14. Wian Boonzaaier & Jarkko Harju & Tuomas Matikka & Jukka Pirttilä, 2019. "How do small firms respond to tax schedule discontinuities? Evidence from South African tax registers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(5), pages 1104-1136, October.
    15. Bussy, Adrien, 2023. "Corporate tax evasion: Evidence from international trade," European Economic Review, Elsevier, vol. 159(C).
    16. Zaresani, Arezou, 2020. "Adjustment cost and incentives to work: Evidence from a disability insurance program," Journal of Public Economics, Elsevier, vol. 188(C).
    17. Brockmeyer,Anne & Hernandez,Marco, 2016. "Taxation, information, and withholding : evidence from Costa Rica," Policy Research Working Paper Series 7600, The World Bank.
    18. Wenyan Sun & Kedong Yin & Zhe Liu, 2021. "Tax Incentives, R&D Manipulation, and Corporate Innovation Performance: Evidence from Listed Companies in China," Sustainability, MDPI, vol. 13(21), pages 1-16, October.
    19. Philippe Aghion & Ufuk Akcigit & Matthieu Lequien & Stefanie Stantcheva, 2017. "Tax simplicity and heterogeneous learning," CEP Discussion Papers dp1516, Centre for Economic Performance, LSE.
    20. Bachas, Pierre & Fattal Jaef, Roberto N. & Jensen, Anders, 2019. "Size-dependent tax enforcement and compliance: Global evidence and aggregate implications," Journal of Development Economics, Elsevier, vol. 140(C), pages 203-222.

    More about this item

    Keywords

    Compliance costs; Value-added tax; Entrepreneurs; Firm behavior;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:173:y:2019:i:c:p:139-164. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505578 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.