81295
                           enGender Impact: The World Bank’s Gender Impact Evaluation Database



               Does it pay firms to register for taxes? The Impact of formality on firm profitability

 Author(s)     David McKenzie and Yaye Seynabou Sakho
  Contact      dmckenzie@worldbank.org

  Country      Bolivia
Organizing
               Economic Opportunities and Access to Assets
 Theme
   Status      Completed
Intervention
             Firm Formalization
  Category
   Sector      Finance and Private Sector Development
               This paper estimates the impact of registering for taxes on firm profits in Bolivia, the country with the highest levels of
               informality in Latin America. A new survey of micro and small firms enables us to control for a rich set of measures of
               owner ability and business motivations that can affect both profits and the decision to formalize. We identify the impact
               of tax registration on business profitability using the distance of a firm from the tax office where registration occurs,
               conditional on the distance to the city center, as an instrument for registration. Proximity to the tax office provides firms
               with more information about registration, but is argued to not directly affect profits. We find tax registration leads to
 Abstract
               significantly higher profits for the firms that the instrument affects. However, we also find some evidence of
               heterogeneous effects of tax formality on profits. Tax registration appears to increase profits for the mid-sized firms in
               our sample, but to lower profits for both the marginal smaller and larger firms, in contrast to the standard view that
               formality increases profits. We show that owners of large firms who have managed to stay informal are of higher
               entrepreneurial ability than formal firm owners, in contrast to the standard view (correct among smaller firms) that
               informal firm owners are low ability.
 Gender
               Gender Informed Analysis
Connection
 Gender
               Gender disaggregated productivity
Outcomes
 IE Design     Instrumental Variable
             The study investigates the impact of firm formalization. In order to formalize, the owner must register with the municipal
Intervention government to obtain a municipal business license, register with the tax authorities to get a tax ID number, and register in
             the registry of congress.
Intervention
             Firms could have formalized at any time before the survey.
   Period
   Sample    There are 469 firms included in the sample. The median firm has been in business for 9 years. Half of the firm owners are
 population female.
Comparison Firms that are formalized are compared to firms that are not formally registered. The study also uses distance to the
 conditions registration office as an instrument to capture probability to register.
   Unit of
             Firm level
  analysis
 Evaluation
             The survey was conducted in August 2005
   Period
             Registering to pay taxes leads to significantly higher profits. Firms which obtain a tax ID number earn 88% greater profits.
   Results
             Male and female owners do not have significantly different profitability. There are heterogeneous effects. Registering has a

             Last updated: 14 August 2013                                                                          1
                            enGender Impact: The World Bank’s Gender Impact Evaluation Database


                positive impact for firms with 2-5 workers, but registering leads to lower profits for firms that are larger than 5 employees
                and smaller than 2 employees.
  Primary
                The distance to the tax office may be correlated with other interactions with the government which also affect
    study
                profitability. There also may be agglomeration effects or information externalities that are not captured.
limitations
  Funding
                World Bank ESW
   Source
                McKenzie, D., & Seynabou Sakho, Y. (2010). Does it pay firms to register for taxes? The impact of formality on firm
Reference(s)
                profitability. Journal of Development Economics, 91(1), 15-24.
  Link to
  Studies       http://www.sciencedirect.com/science/article/pii/S0304387809000170
 Microdata
                http://microdata.worldbank.org/index.php/catalog/1314http://microdata.worldbank.org/index.php/catalog/1314




               Last updated: 14 August 2013                                                                        2