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The Double-Edged Sword: Unintended Consequences of SME Promotion Policy

Author

Listed:
  • Athiphat Muthitacharoen
  • Archawa Paweenawat
  • Krislert Samphantharak

Abstract

This paper investigates the unintended effects of size-dependent regulations in SME promotion policies. Using administrative data from all registered firms in Thailand, we examine the 2012 introduction of a revenue cap—designed for corporate income tax exemption of SMEs—and its cascading impact on firms’ growth and investment decisions and the broader market landscape. Our findings indicate a strong response to the cap, with a significant bunching of firms just below the threshold. After the introduction of the policy, we observe a significant decline in both revenue growth and investment among firms eligible for the scheme, compared to ineligible firms. This adverse effect is more pronounced among firms with lower pre-policy profitability. Additionally, while the size-dependent policy does not directly curtail the growth of large firms, it inadvertently enhances their market share due to the policy’s negative effects on SME growth. Our study highlights the unintended outcomes of SME policies that, while aiming to support smaller entities, may inadvertently curb SME growth—giving an edge to larger firms in the industry.

Suggested Citation

  • Athiphat Muthitacharoen & Archawa Paweenawat & Krislert Samphantharak, 2021. "The Double-Edged Sword: Unintended Consequences of SME Promotion Policy," PIER Discussion Papers 148, Puey Ungphakorn Institute for Economic Research, revised Sep 2023.
    • Handle: RePEc:pui:dpaper:148
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    File URL: https://www.pier.or.th/files/dp/pier_dp_148.pdf
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    Cited by:

    1. Athiphat Muthitacharoen & Wonma Wanichthaworn & Trongwut Burong, 2021. "VAT threshold and small business behavior: evidence from Thai tax returns," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1242-1275, October.

    More about this item

    Keywords

    Bunching; Tax Incentives; Corporate Tax; Size-dependent Policy; Tax Evasion;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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