Do Taxes on Large Firms Impede Growth? Evidence from Ghana

Many developing countries pursue policies that treat large and small firms differently. For example, large firms may be subject to a value added tax while small firms are explicitly exempted. Moreover, governments often find it impractical to collect taxes from the smallest enterprises; this may increase the tax burden for larger firms, whose compliance can be enforced. Such policies clearly affect the size distribution of firms. But how great is the impact on macro variables? How large are the resulting inefficiencies? And what are the dynamic effects on capital accumulation and economic growth? This paper uses a dynamic general equilibrium variant of the Lucas (1978) span-of-control model to address such questions. The model is matched to data from the Ghanaian manufacturing sector. As a policy experiment, alternative tax and regulatory regimes are compared. The model shows that a policy disproportionately penalizing large firms can reduce output by nearly one-half, compared with an alternative policy regime in which all firms face the same taxes and regulatory costs.