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

Jarkko Harju; Tuomas Matikka; Timo Rauhanen

doi:10.1016/j.jpubeco.2019.02.003

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

Jarkko Harju^*
, Tuomas Matikka
, Timo Rauhanen

^*Corresponding author for this work

Research output: Contribution to journal › Article › Scientific › peer-review

32 Citations (Scopus)

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.

Original language	English
Pages (from-to)	139-164
Number of pages	26
Journal	Journal of Public Economics
Volume	173
DOIs	https://doi.org/10.1016/j.jpubeco.2019.02.003
Publication status	Published - May 2019
Externally published	Yes
Publication type	A1 Journal article-refereed

Funding

Previously circulated as “The effects of size-based regulation on small firms: Evidence from VAT threshold”. Many thanks to David Agrawal, Alan Auerbach, Saku Aura, Youssef Benzarti, Leon Bettendorf, Raj Chetty, Alexander Gelber, Yuriy Gorodnichenko, Chris Heady, Ari Hyytinen, Tuomas Kosonen, Kaisa Kotakorpi, Tomi Kyyrä Li Liu, Teemu Lyytikäinen, Simone Moriconi, Andreas Peichl, Emmanuel Saez, Matti Sarvimäki, Joel Slemrod, Mazhar Waseem and Floris Zoutman for their useful comments and discussion. We also thank the participants at many conferences and seminars for their helpful comments. Harju gratefully acknowledges funding from the Foundation for Economic Education. All remaining errors are our own.☆ Previously circulated as “The effects of size-based regulation on small firms: Evidence from VAT threshold”. Many thanks to David Agrawal, Alan Auerbach, Saku Aura, Youssef Benzarti, Leon Bettendorf, Raj Chetty, Alexander Gelber, Yuriy Gorodnichenko, Chris Heady, Ari Hyytinen, Tuomas Kosonen, Kaisa Kotakorpi, Tomi Kyyrä Li Liu, Teemu Lyytikäinen, Simone Moriconi, Andreas Peichl, Emmanuel Saez, Matti Sarvimäki, Joel Slemrod, Mazhar Waseem and Floris Zoutman for their useful comments and discussion. We also thank the participants at many conferences and seminars for their helpful comments. Harju gratefully acknowledges funding from the Foundation for Economic Education. All remaining errors are our own.

Keywords

Compliance costs
Entrepreneurs
Firm behavior
Value-added tax

ASJC Scopus subject areas

Finance
Economics and Econometrics

Access to Document

10.1016/j.jpubeco.2019.02.003

Cite this

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

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.",

keywords = "Compliance costs, Entrepreneurs, Firm behavior, Value-added tax",

author = "Jarkko Harju and Tuomas Matikka and Timo Rauhanen",

note = "Funding Information: Previously circulated as “The effects of size-based regulation on small firms: Evidence from VAT threshold”. Many thanks to David Agrawal, Alan Auerbach, Saku Aura, Youssef Benzarti, Leon Bettendorf, Raj Chetty, Alexander Gelber, Yuriy Gorodnichenko, Chris Heady, Ari Hyytinen, Tuomas Kosonen, Kaisa Kotakorpi, Tomi Kyyr{\"a} Li Liu, Teemu Lyytik{\"a}inen, Simone Moriconi, Andreas Peichl, Emmanuel Saez, Matti Sarvim{\"a}ki, Joel Slemrod, Mazhar Waseem and Floris Zoutman for their useful comments and discussion. We also thank the participants at many conferences and seminars for their helpful comments. Harju gratefully acknowledges funding from the Foundation for Economic Education. All remaining errors are our own.☆ Previously circulated as “The effects of size-based regulation on small firms: Evidence from VAT threshold”. Many thanks to David Agrawal, Alan Auerbach, Saku Aura, Youssef Benzarti, Leon Bettendorf, Raj Chetty, Alexander Gelber, Yuriy Gorodnichenko, Chris Heady, Ari Hyytinen, Tuomas Kosonen, Kaisa Kotakorpi, Tomi Kyyr{\"a} Li Liu, Teemu Lyytik{\"a}inen, Simone Moriconi, Andreas Peichl, Emmanuel Saez, Matti Sarvim{\"a}ki, Joel Slemrod, Mazhar Waseem and Floris Zoutman for their useful comments and discussion. We also thank the participants at many conferences and seminars for their helpful comments. Harju gratefully acknowledges funding from the Foundation for Economic Education. All remaining errors are our own. Publisher Copyright: {\textcopyright} 2019 Elsevier B.V.",

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doi = "10.1016/j.jpubeco.2019.02.003",

language = "English",

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AU - Matikka, Tuomas

AU - Rauhanen, Timo

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N2 - 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.

AB - 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.

KW - Compliance costs

KW - Entrepreneurs

KW - Firm behavior

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JO - Journal of Public Economics

JF - Journal of Public Economics

ER -

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

Abstract

Funding

Keywords

ASJC Scopus subject areas

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