Threshold-dependent tax enforcement and the size distribution of firms: evidence from Germany

International Tax and Public Finance

34 Pages Posted: 10 May 2022

See all articles by Drahomir Klimsa

Drahomir Klimsa

University of Augsburg

Robert Ullmann

University of Augsburg; Norwegian Center for Taxation

Date Written: February 23, 2022

Abstract

This paper investigates firms’ responses to threshold-dependent intensity of tax enforcement. We use administrative tax return data over the entire population of German firms and exploit industry variation in firm size thresholds applied by the tax administration. In our setting, each threshold marks a considerable spike in audit intensity and hence should create strong incentives to bunch below the threshold. However, we find no such effect in our large sample analysis. We attribute this empirical observation to optimization costs, particularly to the costs associated with the operational implementation of size management and to information costs. Our paper adds to the emerging field of studies on potential distortions created by threshold-dependent firm regulation. The findings are also relevant for policymakers, as they suggest that the specific design of threshold-dependent policies might allow governments to increase the efficiency of tax audits without distorting the firm size distribution.

Keywords: tax enforcement, size-dependent regulation, bunching, administrative data, Germany

JEL Classification: H26, H32, K42

Suggested Citation

Klimsa, Drahomir and Ullmann, Robert, Threshold-dependent tax enforcement and the size distribution of firms: evidence from Germany (February 23, 2022). International Tax and Public Finance, Available at SSRN: https://ssrn.com/abstract=4101174

Drahomir Klimsa (Contact Author)

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, Bavaria 86159
Germany

Robert Ullmann

University of Augsburg ( email )

Universitätsstr. 16
Augsburg, 86159
Germany

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/ullmann/Team/Prof_-Dr_-Robert-Ullmann/

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

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