The Effects of Size-Based Regulation on Small Firms: Evidence from VAT Threshold
CESifo, Munich, 2016
CESifo Working Paper No. 6115
There 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.
Public Finance
Behavioural Economics