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Compliance costs vs. tax incentives: Why do entrepreneurs respond to size-based regulations?

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  • Harju, Jarkko
  • Matikka, Tuomas
  • Rauhanen, Timo

Abstract

This paper studies the mechanisms behind the responses of entrepreneurs to size-dependent tax regulation. We exploit the value-added tax (VAT) exemption threshold in Finland. Both tax incentives (remitted VAT) and compliance costs (frequent filing of VAT reports, understanding the VAT system, etc.) change at this sales-based threshold in a discontinuous manner. We utilize variation in both the VAT rate and reporting requirements to show that the large observed sales response is caused by the compliance costs of VAT rather than the level of the VAT rate, highlighting the key role of compliance costs among small firms and entrepreneurs.

Suggested Citation

  • Harju, Jarkko & Matikka, Tuomas & Rauhanen, Timo, 2019. "Compliance costs vs. tax incentives: Why do entrepreneurs respond to size-based regulations?," Journal of Public Economics, Elsevier, vol. 173(C), pages 139-164.
  • Handle: RePEc:eee:pubeco:v:173:y:2019:i:c:p:139-164
    DOI: 10.1016/j.jpubeco.2019.02.003
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    References listed on IDEAS

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    More about this item

    Keywords

    Compliance costs; Value-added tax; Entrepreneurs; Firm behavior;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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