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

David McKenzie and Yaye Seynabou Sakho ()
Additional contact information
Yaye Seynabou Sakho: World Bank

No 3179, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: 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 evidence of heterogeneous effects of tax formality on profits. Tax registration is found to increase profits for the mid-sized firms in our sample, but to lower profits for both the 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.

Keywords: tax registration; entrepreneurial ability; informal sector (search for similar items in EconPapers)
JEL-codes: D21 O12 O17 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-11
New Economics Papers: this item is included in nep-acc and nep-dev
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published - published in: Journal of Development Economics, 2010, 91(1), 15-24

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Related works:
Journal Article: Does it pay firms to register for taxes? The impact of formality on firm profitability (2010)
Working Paper: Does it pay firms to register for taxes ? the impact of formality on firm profitability (2007)
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