Tuomas Matikka: The effects of size-based regulation on small firms: Evidence from VAT threshold
OFS seminar at Statistics Norway. Tuomas Matikka is a Senior Researcher at VATT, Government Institute for Economic Research in Finland.
Various types of size-based regulations for firms are typical in most countries (tax schedules, accounting rules, health and safety standards etc.). However, there is only limited empirical evidence of how firms respond to such rules and what the underlying mechanisms behind observed behavior are. We study these questions by examining the effects of the value-added tax (VAT) threshold on the behavior of small firms using register data on the universe of Finnish firms. We find sizable bunching just below the sales-based VAT threshold, which implies that small firms actively avoid VAT liability. We find that the response is driven by compliance costs of VAT reporting rather than pure tax incentives, which highlights the importance of compliance costs among small firms. In addition, we find no explicit evidence of avoidance or evasion, which suggests that firms respond by reducing true output. Also, we find that bunching behavior is very permanent, implying that the VAT threshold decreases the growth of small firms.
Oslo Fiscal Studies / Statistics Norway