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Size-dependent VAT, Compliance Costs, and Firm Growth

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  • HOSONO Kaoru
  • HOTEI Masaki
  • MIYAKAWA Daisuke

Abstract

We examine how firms' responses to a size-dependent tax policy depend on their productivity and compliance costs. To do so, we explore the value-added tax (VAT or Consumption Tax) in Japan, which gives firms an exemption from filing a consumption tax report and remitting tax to the tax authority if their sales are at or below a certain threshold. We use a massive firm-level dataset from Japan to test the following empirical hypotheses that are based on our theoretical analyses. First, firms are more likely to restrain their sales at the threshold, which results in "bunching," if their productivity is in the middle range. Second, such middle-productivity firms are more likely to bunch when the compliance cost is higher. The estimation results support these hypotheses and indicate that firm-level heterogeneity, both in terms of productivity and compliance cost, matters for the bunching of these firms.

Suggested Citation

  • HOSONO Kaoru & HOTEI Masaki & MIYAKAWA Daisuke, 2019. "Size-dependent VAT, Compliance Costs, and Firm Growth," Discussion papers 19041, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:19041
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    File URL: https://www.rieti.go.jp/jp/publications/dp/19e041.pdf
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    References listed on IDEAS

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    2. 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.
    3. Raj Chetty & John N. Friedman & Emmanuel Saez, 2013. "Using Differences in Knowledge across Neighborhoods to Uncover the Impacts of the EITC on Earnings," American Economic Review, American Economic Association, vol. 103(7), pages 2683-2721, December.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
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    Cited by:

    1. MORIKAWA Masayuki, 2022. "Compliance Costs of Regulations and Productivity," Policy Discussion Papers 22025, Research Institute of Economy, Trade and Industry (RIETI).
    2. Masayuki Morikawa, 2023. "Compliance costs and productivity: an approach from working hours," Journal of Regulatory Economics, Springer, vol. 63(3), pages 117-137, June.

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