Conference Agenda

Size-based regulations and taxation are ubiquitous. In this paper, we examine the impact of size-based taxation on firm growth by exploiting a large and permanent tax reform from Pakistan, where the VAT threshold was raised from PKR 5 million to PKR 10 million. Using a difference-in-differences framework and rich administrative data, we estimate the causal effects of this reform on firms whose growth was previously constrained by the size threshold. Our findings reveal substantial growth effects: treated firms saw their revenue increase by 32 log-points, costs by 19 log-points, and gross profits by 13 log-points. These effects are driven by real economic activity, as third-party reported outcomes, such as wages and imported inputs, also grew by similar margins. Treated firms paid higher taxes across various measures, highlighting their strong willingness to pay to get rid of the size-based taxation.

Value-added tax is commonly the most important source of tax revenue for governments in developing countries but little is currently understood about how firms respond to the tax. Using administrative tax data from West Bengal in India, we study the behavioural response induced by a turnover threshold for compulsory VAT registration. Exploiting variation in the tax discontinuity at the registration threshold across firms and over time, we show that it is tax liabilities rather than compliance costs that explain the bunching of firms below this threshold, and the associated revealed preference for a simplified tax scheme. The limited role for VAT compliance costs in business decisions has important implications for the welfare gains from the tax and for the optimal level of VAT registration thresholds.

This paper examines how small and medium-sized businesses respond to a size-based tax and reporting threshold in the German local business tax. Using novel administrative tax return data covering the vast majority of German businesses, we document significant bunching at the tax allowance threshold while reporting requirements play a minor role. Following a cohort-based difference-in-differences approach we show how businesses manage their profits to stay below the tax allowance threshold. The bunching response is driven by a reduction in reported revenue and an increase in costs with some expenditure items potentially reflecting private consumption channeled through the firm.

How do tax enforcement interventions diffuse through firm-to-firm networks? We explore this question with a randomized trial in Uganda. Using transaction-level VAT data, we map seller-buyer networks and identify discrepancies in the amounts reported by trading partners. Enforcement letters highlighting these discrepancies are sent to either the seller, the buyer, or both. The correction rate in the treatment group is 23.8%, fourteen times higher than in the control group. This response is asymmetric: corrections are primarily made by sellers, even when only buyers receive letters, providing novel evidence that firms can induce changes in their partners’ tax reporting. Spillover effects extend to transactions not listed in the letters, including those involving other trading partners. The intervention also results in sustained improvements in reporting behavior over subsequent months. Our study sheds light on firm-to-firm communication within networks and offers policy-relevant insights for fighting tax evasion.