Small Firms’ Formalization : The Stick Treatment
Firm informality is pervasive throughout the developing world, Bangladesh being no exception. The informal status of many firms substantially reduces the tax basis and therefore impacts the provision of public goods. The literature on encouraging f...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2015/06/24679230/small-firms’-formalization-stick-treatment http://hdl.handle.net/10986/22204 |
| Summary: | Firm informality is pervasive throughout
the developing world, Bangladesh being no exception. The
informal status of many firms substantially reduces the tax
basis and therefore impacts the provision of public goods.
The literature on encouraging formalization has
predominantly focused on reducing the direct costs of
formalization and has found negligible impacts of such
policies. This paper focuses on a stick intervention, which
to the best of the knowledge of the authors is the first one
in a developing country setting that deals with the most
direct and dominant form of informality, i.e. registration
with the tax authority with a direct link to the countrys
potential revenue base and thus public goods provision. The
paper implements an experiment in which firms are visited by
tax representatives who deliver an official letter from the
Bangladesh National Tax Authority stating that the firm is
not registered and the consequential punishment if the firm
fails to register. The paper finds that the intervention
increases the rate of registration among treated firms,
while firms located in the same market but not treated do
not seem to respond significantly. The paper also finds that
only larger revenue firms at baseline respond to the threat
and register. These findings have at least two important
policy implications: i. the enforcement angle, which could
be an important tool to encourage formalization; and ii.
targeting of government resources for formalization to the
high-end informal firms. The effects are generally small in
levels and this leaves open the question of why many firms
still do not register. |
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