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The Effects of Formalization on Small and Medium-Sized Enterprise Tax Payments: Panel Evidence from Viet Nam

Amadou Boly

Asian Development Review, 2020, vol. 37, issue 1, 140-158

Abstract: Do firms pay more taxes after formalization? The answer to this question is nontrivial. Tax noncompliance can be a persistent behavior among formerly informal firms. Analyzing the relationship between formalization and tax payments can also be challenging if nonswitching and switching firms have different characteristics. I use a panel dataset built from five small and medium-sized enterprise surveys conducted in Viet Nam from 2005 to 2013. By comparing nonswitching informal firms to switchers, I show that switchers are more likely to pay taxes and to pay a higher amount, thereby confirming heterogeneity. By comparing switchers before and after formalization, I find that formalization increases tax payment likelihood by 20% and the tax amount paid by 93%. A control function approach indicates that my results are robust to potential endogeneity of formalization. Therefore, this paper provides supportive evidence for a key public policy rationale to promote formalization: increased tax revenues.

Keywords: formalization; taxes; Viet Nam (search for similar items in EconPapers)
JEL-codes: D22 O12 O17 (search for similar items in EconPapers)
Date: 2020
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