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 the authors to control for a rich set of measure...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2007/12/8887984/pay-firms-register-taxes-impact-formality-firm-profitability http://hdl.handle.net/10986/7536 |
| Summary: | 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 the
authors to control for a rich set of measures of owner
ability and business motivations that can affect both
profits and the decision to formalize. The paper identifies
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.
The findings show that tax registration leads to
significantly higher profits for the firms that the
instrument affects. However, there is also evidence of
heterogeneous effects of tax formality on profits. Tax
registration is found to increase profits for the mid-size
firms in the sample, but to lower profits for both the
smaller and larger firms, in contrast to the standard view
that formality increases profits. The analysis shows that
owners of large firms who have managed to stay informal have
higher entrepreneurial ability than formal firm owners, in
contrast to the standard view (correct among smaller firms)
that informal firm owners have low ability. |
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