Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability

This paper estimates the impact of registering for taxes on firm profits in Bolivia, the country with the highest levels of informality in Latin America. A new survey of micro and small firms enables us to control for a rich set of measures of owner ability and business motivations that can affect b...

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Main Authors:	McKenzie, David, Seynabou Sakho, Yaye
Format:	Journal Article
Language:	EN
Published:	2012
Subjects:	Business Taxes and Subsidies including sales and value-added (VAT) H250 Fiscal Policies and Behavior of Economic Agents: Firm H320 Firm Performance: Size, Diversification, and Scope L250 Fiscal and Monetary Policy in Development O230 Microdata Set
Online Access:	http://hdl.handle.net/10986/4760

id	okr-10986-4760
recordtype	oai_dc
spelling	okr-10986-47602021-04-23T14:02:19Z Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability McKenzie, David Seynabou Sakho, Yaye Business Taxes and Subsidies including sales and value-added (VAT) H250 Fiscal Policies and Behavior of Economic Agents: Firm H320 Firm Performance: Size, Diversification, and Scope L250 Fiscal and Monetary Policy in Development O230 Microdata Set This paper estimates the impact of registering for taxes on firm profits in Bolivia, the country with the highest levels of informality in Latin America. A new survey of micro and small firms enables us to control for a rich set of measures of owner ability and business motivations that can affect both profits and the decision to formalize. We identify the impact of tax registration on business profitability using the distance of a firm from the tax office where registration occurs, conditional on the distance to the city center, as an instrument for registration. Proximity to the tax office provides firms with more information about registration, but is argued to not directly affect profits. We find tax registration leads to significantly higher profits for the firms that the instrument affects. However, we also find some evidence of heterogeneous effects of tax formality on profits. Tax registration appears to increase profits for the mid-sized firms in our sample, but to lower profits for both the marginal smaller and larger firms, in contrast to the standard view that formality increases profits. We show that owners of large firms who have managed to stay informal are of higher entrepreneurial ability than formal firm owners, in contrast to the standard view (correct among smaller firms) that informal firm owners are low ability. 2012-03-30T07:29:36Z 2012-03-30T07:29:36Z 2010 Journal Article Journal of Development Economics 03043878 http://hdl.handle.net/10986/4760 EN CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Journal Article Latin America Bolivia
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	EN
topic	Business Taxes and Subsidies including sales and value-added (VAT) H250 Fiscal Policies and Behavior of Economic Agents: Firm H320 Firm Performance: Size, Diversification, and Scope L250 Fiscal and Monetary Policy in Development O230 Microdata Set
spellingShingle	Business Taxes and Subsidies including sales and value-added (VAT) H250 Fiscal Policies and Behavior of Economic Agents: Firm H320 Firm Performance: Size, Diversification, and Scope L250 Fiscal and Monetary Policy in Development O230 Microdata Set McKenzie, David Seynabou Sakho, Yaye Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability
geographic_facet	Latin America Bolivia
description	This paper estimates the impact of registering for taxes on firm profits in Bolivia, the country with the highest levels of informality in Latin America. A new survey of micro and small firms enables us to control for a rich set of measures of owner ability and business motivations that can affect both profits and the decision to formalize. We identify the impact of tax registration on business profitability using the distance of a firm from the tax office where registration occurs, conditional on the distance to the city center, as an instrument for registration. Proximity to the tax office provides firms with more information about registration, but is argued to not directly affect profits. We find tax registration leads to significantly higher profits for the firms that the instrument affects. However, we also find some evidence of heterogeneous effects of tax formality on profits. Tax registration appears to increase profits for the mid-sized firms in our sample, but to lower profits for both the marginal smaller and larger firms, in contrast to the standard view that formality increases profits. We show that owners of large firms who have managed to stay informal are of higher entrepreneurial ability than formal firm owners, in contrast to the standard view (correct among smaller firms) that informal firm owners are low ability.
format	Journal Article
author	McKenzie, David Seynabou Sakho, Yaye
author_facet	McKenzie, David Seynabou Sakho, Yaye
author_sort	McKenzie, David
title	Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability
title_short	Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability
title_full	Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability
title_fullStr	Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability
title_full_unstemmed	Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability
title_sort	does it pay firms to register for taxes? the impact of formality on firm profitability
publishDate	2012
url	http://hdl.handle.net/10986/4760
_version_	1764392655557492736

Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability

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