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Small business tax policy and informality: evidence from Georgia

Listed author(s):
  • Miriam Bruhn

    ()

    (World Bank Group)

  • Jan Loeprick

    ()

    (World Bank Group and Vienna University of Economics and Business)

Abstract Using a panel of administrative data and regression discontinuity analysis, this paper examines how the introduction of preferential tax regimes for Georgian micro- and small businesses in 2010 affected formal firm creation and tax compliance. The results show that the new tax regime for micro-businesses increased the number of newly registered firms by 27–41 % below the eligibility threshold during the first year of the reform, but not in subsequent years. We do not find an effect of the new tax regime for small businesses on formal firm creation in any year. Policy makers are often also concerned about abuse risks stemming from differentiated tax treatment of micro- and small businesses. The analysis in this paper reveals reduced tax compliance among small taxpayers for multiple years after the reform and among micro-business taxpayers only during the first year of the reform.

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File URL: http://link.springer.com/10.1007/s10797-015-9385-9
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Article provided by Springer & International Institute of Public Finance in its journal International Tax and Public Finance.

Volume (Year): 23 (2016)
Issue (Month): 5 (October)
Pages: 834-853

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Handle: RePEc:kap:itaxpf:v:23:y:2016:i:5:d:10.1007_s10797-015-9385-9
DOI: 10.1007/s10797-015-9385-9
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  1. Ravi Kanbur & Michael Keen, 2014. "Thresholds, informality, and partitions of compliance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 536-559, August.
  2. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2002. "The Regulation of Entry," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 1-37.
  3. repec:hrv:faseco:30747190 is not listed on IDEAS
  4. Fajnzylber, Pablo & Maloney, William F. & Montes-Rojas, Gabriel V., 2011. "Does formality improve micro-firm performance? Evidence from the Brazilian SIMPLES program," Journal of Development Economics, Elsevier, vol. 94(2), pages 262-276, March.
  5. Onji, Kazuki, 2009. "The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 766-775, June.
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  7. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 749-804.
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  9. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730, December.
  10. Miriam Bruhn & David McKenzie, 2014. "Entry Regulation and the Formalization of Microenterprises in Developing Countries," World Bank Research Observer, World Bank Group, vol. 29(2), pages 186-201.
  11. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
  12. Mazhar Waseem, 2013. "Taxes, Informality and Income Shifting: Evidence from a Recent Pakistani Tax Reform," 2013 Papers pwa641, Job Market Papers.
  13. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
  14. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 669-723.
  15. Ihrig, Jane & Moe, Karine S., 2004. "Lurking in the shadows: the informal sector and government policy," Journal of Development Economics, Elsevier, vol. 73(2), pages 541-557, April.
  16. Slonimczyk, Fabian, 2011. "The effect of taxation on informal employment: evidence from the Russian flat tax reform," MPRA Paper 35404, University Library of Munich, Germany.
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