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

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.