Advanced Search
MyIDEAS: Login

Does it pay firms to register for taxes ? the impact of formality on firm profitability

Contents:

Author Info

  • McKenzie, David
  • Sakho, Yaye Seynabou

Abstract

This paper estimates the impact of registering for taxes on firm profits in Bolivia, the country with the highest levels of informality in Latin America. A new survey of micro and small firms enables the authors to control for a rich set of measures of owner ability and business motivations that can affect both profits and the decision to formalize. The paper identifies the impact of tax registration on business profitability using the distance of a firm from the tax office where registration occurs, conditional on the distance to the city center, as an instrument for registration. Proximity to the tax office provides firms with more information about registration, but is argued to not directly affect profits. The findings show that tax registration leads to significantly higher profits for the firms that the instrument affects. However, there is also evidence of heterogeneous effects of tax formality on profits. Tax registration is found to increase profits for the mid-size firms in the sample, but to lower profits for both the smaller and larger firms, in contrast to the standard view that formality increases profits. The analysis shows that owners of large firms who have managed to stay informal have higher entrepreneurial ability than formal firm owners, in contrast to the standard view (correct among smaller firms) that informal firm owners have low ability.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2007/12/17/000158349_20071217153447/Rendered/PDF/wps4449.pdf
Download Restriction: no

Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4449.

as in new window
Length:
Date of creation: 01 Dec 2007
Date of revision:
Handle: RePEc:wbk:wbrwps:4449

Contact details of provider:
Postal: 1818 H Street, N.W., Washington, DC 20433
Phone: (202) 477-1234
Email:
Web page: http://www.worldbank.org/
More information through EDIRC

Related research

Keywords: Microfinance; Debt Markets; Transport Economics Policy&Planning; Taxation&Subsidies; E-Business;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
  2. Straub, Stéphane, 2005. "Informal sector: The credit market channel," Journal of Development Economics, Elsevier, vol. 78(2), pages 299-321, December.
  3. Bruhn, Miriam, 2008. "License to sell : the effect of business registration reform on entrepreneurial activity in Mexico," Policy Research Working Paper Series 4538, The World Bank.
  4. Kaplan, David S. & Piedra, Eduardo & Seira, Enrique, 2007. "Entry regulation and business start-ups : evidence from Mexico," Policy Research Working Paper Series 4322, The World Bank.
  5. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World - Size, Causes, and Consequences," IMF Working Papers 00/26, International Monetary Fund.
  6. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2007. "Measuring microenterprise profits : don't ask how the sausage is made," Policy Research Working Paper Series 4229, The World Bank.
  7. David J. McKenzie & Christopher Woodruff, 2006. "Do Entry Costs Provide an Empirical Basis for Poverty Traps? Evidence from Mexican Microenterprises," Economic Development and Cultural Change, University of Chicago Press, vol. 55, pages 3-42.
  8. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December.
  9. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  10. Alberto Abadie & David Drukker & Jane Leber Herr & Guido W. Imbens, 2004. "Implementing matching estimators for average treatment effects in Stata," Stata Journal, StataCorp LP, vol. 4(3), pages 290-311, September.
  11. John Gibson & David McKenzie, 2007. "Using the Global Positioning System (GPS) in Household Surveys For Better Economics and Better Policy," Working Papers in Economics 07/04, University of Waikato, Department of Economics.
  12. Imbens, Guido W & Angrist, Joshua D, 1994. "Identification and Estimation of Local Average Treatment Effects," Econometrica, Econometric Society, vol. 62(2), pages 467-75, March.
  13. David Kaplan & Eduardo Piedra & Enrique Seira, 2006. "Are Burdensome Registration Procedures an Important Barrier on Firm Creation? Evidence from Mexico," Discussion Papers 06-013, Stanford Institute for Economic Policy Research.
  14. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  15. Katayama, Hajime & Lu, Shihua & Tybout, James R., 2009. "Firm-level productivity studies: Illusions and a solution," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 403-413, May.
  16. Fajnzylber, Pablo & Maloney, William F. & Rojas, Gabriel V. Montes, 2006. "Releasing constraints to growth or pushing on a string ? the impact of credit, training, business associations, and taxes on the performance of Mexican micro-firms," Policy Research Working Paper Series 3807, The World Bank.
  17. Fajnzylber, Pablo & Maloney, William F. & Montes-Rojas, Gabriel V., 2009. "Does Formality Improve Micro-Firm Performance? Quasi-Experimental Evidence from the Brazilian SIMPLES Program," IZA Discussion Papers 4531, Institute for the Study of Labor (IZA).
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Huu Chi Nguyen & Christophe Nordman & François Roubaud, 2011. "Who Suffers the Penalty? A Panel Data Analysis of Earnings Gaps in Vietnam," Working Papers DT/2011/15, DIAL (Développement, Institutions et Mondialisation).
  2. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2012. "The demand for, and consequences of, formalization among informal firms in Sri Lanka," Policy Research Working Paper Series 5991, The World Bank.
  3. Bruhn, Miriam & McKenzie, David, 2013. "Using administrative data to evaluate municipal reforms : an evaluation of the impact of Minas Facil Expresso," Policy Research Working Paper Series 6368, The World Bank.
  4. Darwin Ugarte Ontiveros & Vincenzo Verardi, 2012. "Supposedly Strong Instruments and Good Leverage Points," Working Papers 1203, University of Namur, Department of Economics.
  5. de Andrade, Gustavo Henrique & Bruhn, Miriam & McKenzie, David, 2013. "A helping hand or the long arm of the law ? experimental evidence on what governments can do to formalize firms," Policy Research Working Paper Series 6435, The World Bank.
  6. David McKenzie, 2010. "Impact Assessments in Finance and Private Sector Development: What Have We Learned and What Should We Learn?," World Bank Research Observer, World Bank Group, vol. 25(2), pages 209-233, August.
  7. Neil McCulloch & Günther G. Schulze & Janina Voss, 2010. "What Determines Firms’ Decisions to Formalize?," Discussion Paper Series 13, Department of International Economic Policy, University of Freiburg, revised Nov 2010.
  8. Gustavo Adolfo García, 2010. "Evolución de la informalidad laboral en Colombia: determinantes macro y efectos locales," ARCHIVOS DE ECONOMÍA 006449, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  9. Ugarte, Darwin, 2012. "The impact of formality on firm profitability in Bolivia: an heterogeneous assessment," Revista Latinoamericana de Desarrollo Economico, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana, issue 17, pages 53-74, Mayo.
  10. Bennett, John, 2008. "Formality, Informality, and Social Welfare," IZA Discussion Papers 3550, Institute for the Study of Labor (IZA).
  11. Olivier Bargain & Eliane El Badaoui & Prudence Kwenda & Eric Strobl & Frank Walsh, 2012. "The Formal Sector Wage Premium and Firm Size for Self-employed Workers," Working Papers 201207, School Of Economics, University College Dublin.
  12. Bruhn, Miriam, 2012. "A tale of two species : revisiting the effect of registration reform on informal business owners in Mexico," Policy Research Working Paper Series 5971, The World Bank.
  13. Erol Taymaz, 2009. "Informality and Productivity: Productivity Differentials between Formal and Informal Firms in Turkey," ERC Working Papers 0901, ERC - Economic Research Center, Middle East Technical University, revised Mar 2009.
  14. Ana Corbacho & Rene Osorio Rivas, 2012. "Travelling the Distance: A GPS-Based Study of the Access to Birth Registration Services in Latin America and the Caribbean," IDB Publications 64458, Inter-American Development Bank.
  15. John Rand & Finn Tarp, 2012. "Firm-Level Corruption in Vietnam," Economic Development and Cultural Change, University of Chicago Press, vol. 60(3), pages 571 - 595.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:4449

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.