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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.

Suggested Citation

  • Gollin, Douglas, 1995. "Do Taxes on Large Firms Impede Growth? Evidence from Ghana," Bulletins 7488, University of Minnesota, Economic Development Center.
  • Handle: RePEc:ags:umedbu:7488
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    References listed on IDEAS

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    Cited by:

    1. Leal-Ordoñez Julio C., 2014. "The informal sector in contemporary models of the aggregate economy," Working Papers 2014-24, Banco de México.
    2. Nezih Guner & Gustavo Ventura & Xu Yi, 2008. "Macroeconomic Implications of Size-Dependent Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 721-744, October.
    3. Gollin, Douglas, 2008. "Nobody's business but my own: Self-employment and small enterprise in economic development," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 219-233, March.
    4. Julio Cesar Leal Ordonez, 2014. "Tax collection, the informal sector, and productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 262-286, April.
    5. Ngotran, Duong & Ngo, Tien, 2013. "Retail Sector and Economic Development," MPRA Paper 61590, University Library of Munich, Germany, revised Aug 2014.
    6. Leal Ordóñez, Julio C., 2010. "Informal sector, productivity, and tax collection," MPRA Paper 26058, University Library of Munich, Germany, revised Oct 2010.
    7. Guner, Nezih & Ventura, Gustavo & Yi, Xu, 2006. "How costly are restrictions on size?," Japan and the World Economy, Elsevier, vol. 18(3), pages 302-320, August.

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