Small Firms' Formalisation : 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 formalization has predominantly focused on reducing t...

Full description

Bibliographic Details
Main Authors:	De Giorgi, Giacomo, Ploenzke, Matthew, Rahman, Aminur
Format:	Journal Article
Published:	Taylor and Francis 2018
Subjects:	FIRMS INFORMALITY DEVELOPMENT TAX BASE TAX ADMINISTRATION REGISTRATION ENFORCEMENT
Online Access:	http://hdl.handle.net/10986/29660

id	okr-10986-29660
recordtype	oai_dc
spelling	okr-10986-296602021-05-25T10:54:36Z Small Firms' Formalisation : The Stick Treatment De Giorgi, Giacomo Ploenzke, Matthew Rahman, Aminur FIRMS INFORMALITY DEVELOPMENT TAX BASE TAX ADMINISTRATION REGISTRATION ENFORCEMENT 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. In this paper, we focus on a stick intervention, which to the best of our knowledge is the first one in a developing country setting that deals with the most direct and dominant form of informality, that is registration with the tax authority with a direct link to the country’s potential revenue base and thus public goods provision. We implement an experiment in which randomly selected 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. We find 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. We also find that only larger revenue firms at baseline respond to the threat and register. Our 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 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. 2018-04-11T19:27:39Z 2018-04-11T19:27:39Z 2018 Journal Article The Journal of Development Studies 0022-0388 http://hdl.handle.net/10986/29660 CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Taylor and Francis Publications & Research :: Journal Article Publications & Research South Asia Bangladesh
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
topic	FIRMS INFORMALITY DEVELOPMENT TAX BASE TAX ADMINISTRATION REGISTRATION ENFORCEMENT
spellingShingle	FIRMS INFORMALITY DEVELOPMENT TAX BASE TAX ADMINISTRATION REGISTRATION ENFORCEMENT De Giorgi, Giacomo Ploenzke, Matthew Rahman, Aminur Small Firms' Formalisation : The Stick Treatment
geographic_facet	South Asia Bangladesh
description	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. In this paper, we focus on a stick intervention, which to the best of our knowledge is the first one in a developing country setting that deals with the most direct and dominant form of informality, that is registration with the tax authority with a direct link to the country’s potential revenue base and thus public goods provision. We implement an experiment in which randomly selected 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. We find 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. We also find that only larger revenue firms at baseline respond to the threat and register. Our 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 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.
format	Journal Article
author	De Giorgi, Giacomo Ploenzke, Matthew Rahman, Aminur
author_facet	De Giorgi, Giacomo Ploenzke, Matthew Rahman, Aminur
author_sort	De Giorgi, Giacomo
title	Small Firms' Formalisation : The Stick Treatment
title_short	Small Firms' Formalisation : The Stick Treatment
title_full	Small Firms' Formalisation : The Stick Treatment
title_fullStr	Small Firms' Formalisation : The Stick Treatment
title_full_unstemmed	Small Firms' Formalisation : The Stick Treatment
title_sort	small firms' formalisation : the stick treatment
publisher	Taylor and Francis
publishDate	2018
url	http://hdl.handle.net/10986/29660
_version_	1764469913464864768

Small Firms' Formalisation : The Stick Treatment

Similar Items