Government Tax Policy and Small Businesses: Regression Discontinuity Evidence from Scotland

Evidence evaluating the effect of the tax structure on the growth and survival of small businesses is often inconclusive. We employ a sharp regression discontinuity design to evaluate a tax relief policy for small businesses introduced in Scotland in 2008. We leverage the exogenous nature of the cut-off that determines whether a business qualifies for a 100% discount on non-domestic rates based on a property’s “rateable value” to assess how the policy impacted the growth and survival of small businesses in the city of Glasgow. We find that the tax relief scheme is associated with heightened growth and survival of small businesses benefiting from the discount in the years following its implementation. However, our results speak to the challenges of fully separating a possible causal effect of the policy from changes induced by sorting or manipulation of assignment to treatment. Further tests indicate that the periodically performed re-evaluations of rateable values tend to concentrate just below the exemption cut-off, suggesting that there are other factors that might be influencing the outcome.