This paper uses administrative data from all registered Thai firms to investigate the unintended consequences of size-dependent regulations in SME promotion policies. Focusing on Thailand’s 2011 introduction of a revenue cap for the SME tax incentive program, which mandates that firms must never exceed this threshold, we capitalize on this exogenous policy shift to assess its effects on firm’s growth. Our study shows a marked bunching of firms just below the cap. A difference-in-differences analysis indicates that, following the cap introduction, eligible firms under the threshold exhibit a significant decline in revenue growth compared to those just above it. This adverse effect is more pronounced among firms with lower pre-policy profitability. We further document substantial negative effects on investment and profitability. Our findings highlight the paradox within size-based SME policies: while intended to help smaller businesses, the measures might inadvertently suppress growth and deter investment.

This paper shows that bargaining over tax payments is an important feature of tax compliance and enforcement in lower income countries. Analyzing the universe of administrative tax filings from Zambia, we document sharp bunching in (i) dominated regions above tax schedule discontinuities and (ii) at round number tax payments (not necessarily round turnover). Additional evidence from our own survey suggests that discussing tax payments with tax officials before filing taxes is widespread, consistent with tax payments being the outcomes of bargaining. Such bargaining over taxes is consistent with fact (ii), as bargaining outcomes are often round numbers, and with fact (i), because tax schedule discontinuities restrict the set of feasible bargaining outcomes. In contrast, alternative cannot rationalize the bunching patterns and are inconsistent with additional experimental survey evidence. Finally, we generalize the conventional Allingham Sandmo (1972) model and show that bargaining leads to pareto-improvements if state capacity is sufficiently low.

Promoting growth of small firms is an important policy concern. However, size-based policies can incentivize firms to remain below a threshold. Using the context of an Indian revenue-based tax registration threshold that affected only manufacturing firms but not services firms, coupled with administrative tax data, we examine how firm growth responds to the threshold. We find that firms respond by slowing down growth in reported revenue from far below the threshold. Our difference-in-difference estimates suggest this slowdown to be around 14 percentage points or roughly 42% of average growth. A lack of corresponding change in reported costs, along with heterogeneity analysis suggests an evasion response rather than a real response by firms. We modify the standard Allingham-Sandmo model of evasion to calculate deadweight loss due to a threshold in a dynamic setting and find that the welfare cost of a threshold can be substantial in the long run.

Turnover is a key indicator of economic activity, but we know little about how much entrepreneurs adjust it as a response to taxation. This paper exploits the notch created by the eligibility cut-off of the preferential turnover tax regime for solo self-employed in Italy to study turnover responses to taxation. I find substantial and significant bunching below the turnover threshold of the regime. Professionals, business intermediaries and retailers have the largest observed responses. I estimate the turnover tax elasticity in these three sectors by focusing on the marginal buncher. To do so, I build on Kleven and Waseem (2013) to develop a theoretical framework that fits the institutional set-up and rationalises the observed responses to it. Professionals have the largest turnover elasticity (0.066). Difference in compliance costs across regimes explains less than half of the observed responses, therefore highlighting the key role of low taxation for the observed bunching behaviour.