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

Jarkko Harju, Tuomas Matikka and Timo Rauhanen

Journal of Public Economics, 2019, vol. 173, issue C, 139-164

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; Value-added tax; Entrepreneurs; Firm behavior (search for similar items in EconPapers)
JEL-codes: D22 H25 H32 L11 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:173:y:2019:i:c:p:139-164

DOI: 10.1016/j.jpubeco.2019.02.003

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