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The Effects of Formalization on Small and Medium-Sized Enterprise Tax Payments: Panel Evidence from Viet Nam

Author

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  • Amadou Boly

    (African Development Bank, Abidjan, Côte d'Ivoire.Author-email: a.boly@afdb.org)

Abstract

Do firms pay more taxes after formalization? The answer to this question is nontrivial. Tax noncompliance can be a persistent behavior among formerly informal firms. Analyzing the relationship between formalization and tax payments can also be challenging if nonswitching and switching firms have different characteristics. I use a panel dataset built from five small and medium-sized enterprise surveys conducted in Viet Nam from 2005 to 2013. By comparing nonswitching informal firms to switchers, I show that switchers are more likely to pay taxes and to pay a higher amount, thereby confirming heterogeneity. By comparing switchers before and after formalization, I find that formalization increases tax payment likelihood by 20% and the tax amount paid by 93%. A control function approach indicates that my results are robust to potential endogeneity of formalization. Therefore, this paper provides supportive evidence for a key public policy rationale to promote formalization: increased tax revenues.

Suggested Citation

  • Amadou Boly, 2020. "The Effects of Formalization on Small and Medium-Sized Enterprise Tax Payments: Panel Evidence from Viet Nam," Asian Development Review, MIT Press, vol. 37(1), pages 140-158, March.
    • Handle: RePEc:tpr:adbadr:v:37:y:2020:i:1:p:140-158
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    File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/adev_a_00144
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    Cited by:

    1. Do, Tien Kim Thi & Van Vu, Huong, 2021. "Does formalization increase firm investment in human capital? New evidence from Vietnam," Finance Research Letters, Elsevier, vol. 42(C).

    More about this item

    Keywords

    formalization; taxes; Viet Nam;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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