Small Business Tax Policy, Informality, and Tax Evasion Evidence from Georgia

Abstract

Using a panel of administrative data and regression discontinuity analysis, this paper examines how the introduction of preferential tax regimes for Georgian micro and small businesses in 2010 affects formal firm creation and tax compliance. The results show that the new tax regime for micro businesses increased the number of newly registered formal firms by 18-30 percent below the eligibility threshold during the first year of the reform, but not in subsequent years. The analysis does not find an effect of the new tax regime for small businesses on formal firm creation in any year. Policy makers are often concerned about abuse risks stemming from differentiated tax treatment of micro and small businesses. The analysis in this paper reveals reduced tax compliance in 2010 around the micro business eligibility threshold, but does not find significant evidence of reduced compliance by Georgian firms in later years. The results also do not show any significant evidence of strategic sorting around the regime eligibility thresholds.

Taxing the informal sector through presumptive taxes in Zimbabwe: An avenue for a broadened tax base, stifling of the informal sector activities or both

“…In order for governments in developing countries to reap any meaningful enlarged revenues from this sector, they have to equally invest into it and nurture it. There is a great potential to grow the contribution of the informal sector to revenue mobilisation and economic growth if necessary institutional support is availed to them to foster their productive capacity (Bruhn and Loeprick, 2014;Bruhn and McKenzie, 2014). An enhanced tax base can only become a reality when governments start supporting the productive capabilities of IS activities through innovative formalisation activities that also address the growth constraints faced by the sector (Arosanyin et al, 2009;Gerxhani, 2004).…”

MSME Taxation in Transition Economies:Country Experience on the Costs and Benefits of Introducing Special Tax Regimes

“…In the case of Georgia, which exempted micro businesses from taxation, initial assessments of taxpayer behavior following the reform suggest that a noticeable downward migration of small businesses did not occur (Bruhn and Loeprick 2014). Downward migration is thus not a given, provided that the micro threshold is sufficiently low, while effective compliance management covers the segment, and the small business regime is operated reasonably well.…”