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The Effects of Size-Based Regulation on Small Firms: Evidence from VAT Threshold

Jarkko Harju (), Tuomas Matikka () and Timo Rauhanen

No 6115, CESifo Working Paper Series from CESifo Group Munich

Abstract: There is only limited evidence of how small firms respond to size-based regulations applied in various countries. We study this question by examining the value-added tax (VAT) threshold in Finland. We find sizable bunching of firms in the sales distribution just below the exemption threshold, implying that firms actively avoid VAT liability. We utilize variation in both the VAT rate and reporting requirements to provide compelling evidence that the response is caused by the compliance costs of VAT reporting rather than the level of the tax rate. In addition, we find that compliance costs hinder the growth of small firms.

Keywords: firm behavior; compliance costs; value-added tax (search for similar items in EconPapers)
JEL-codes: D22 H25 H32 L11 (search for similar items in EconPapers)
Date: 2016
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