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Do Taxes on Large Firms Impede Growth? Evidence from Ghana

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  • Gollin, Douglas

Abstract

Many developing countries pursue policies that treat large and small firms differently. For example, large firms may be subject to a value added tax while small firms are explicitly exempted. Moreover, governments often find it impractical to collect taxes from the smallest enterprises; this may increase the tax burden for larger firms, whose compliance can be enforced. Such policies clearly affect the size distribution of firms. But how great is the impact on macro variables? How large are the resulting inefficiencies? And what are the dynamic effects on capital accumulation and economic growth? This paper uses a dynamic general equilibrium variant of the Lucas (1978) span-of-control model to address such questions. The model is matched to data from the Ghanaian manufacturing sector. As a policy experiment, alternative tax and regulatory regimes are compared. The model shows that a policy disproportionately penalizing large firms can reduce output by nearly one-half, compared with an alternative policy regime in which all firms face the same taxes and regulatory costs.

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Bibliographic Info

Paper provided by University of Minnesota, Economic Development Center in its series Bulletins with number 7488.

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Date of creation: 1995
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Handle: RePEc:ags:umedbu:7488

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Keywords: Public Economics;

References

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  1. Shah, Anwar & Slemrod, Joel, 1991. "Do Taxes Matter for Foreign Direct Investment?," World Bank Economic Review, World Bank Group, vol. 5(3), pages 473-91, September.
  2. Francis Teal, 1995. "Real wages and the demand for labour in Ghana's manufacturing sector," CSAE Working Paper Series 1995-07, Centre for the Study of African Economies, University of Oxford.
  3. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  4. Liedholm, Carl & Mead, Donald C., 1987. "Small Scale Industries in Developing Countries: Empirical Evidence and Policy Implications," Food Security International Development Papers 54062, Michigan State University, Department of Agricultural, Food, and Resource Economics.
  5. Chamley, Christophe, 1991. "Taxation of financial assets in developing countries," Policy Research Working Paper Series 651, The World Bank.
  6. Chamley, Christophe, 1991. "Taxation of Financial Assets in Developing Countries," World Bank Economic Review, World Bank Group, vol. 5(3), pages 513-33, September.
  7. Lloyd-Ellis, Huw & Bernhardt, Dan, 2000. "Enterprise, Inequality and Economic Development," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 147-68, January.
  8. Skinner, Jonathan, 1991. "Prospects for Agricultural Land Taxation in Developing Countries," World Bank Economic Review, World Bank Group, vol. 5(3), pages 493-511, September.
  9. Steel, W.F. & Webster, L.M., 1991. "Small enterprises under adjustment in Ghana," Papers 138, World Bank - Technical Papers.
  10. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  11. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  12. Burgess, Robin & Stern, Nicholas, 1993. "Taxation and Development," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 762-830, June.
  13. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  14. R. Hirschowitz, 1989. "The Other Path: The Invisible Revolution in the Third World," South African Journal of Economics, Economic Society of South Africa, vol. 57(4), pages 266-272, December.
  15. J. Clark Leith, 1974. "Foreign Trade Regimes and Economic Development: Ghana," NBER Books, National Bureau of Economic Research, Inc, number leit74-1.
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Cited by:
  1. Guner, Nezih & Ventura, Gustavo & Xu, Yi, 2007. "Macroeconomic Implications of Size-Dependent Policies," CEPR Discussion Papers 6138, C.E.P.R. Discussion Papers.
  2. Leal Ordóñez, Julio C., 2010. "Informal sector, productivity, and tax collection," MPRA Paper 26058, University Library of Munich, Germany, revised Oct 2010.
  3. Douglas Gollin, 2001. "Nobody's Business but My Own: Self Employment and Small Enterprise in Economic Development," Center for Development Economics 172, Department of Economics, Williams College.

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