Essays in Honor of Roy Bahl
Studies in Fiscal Federalism and State–local Finance series
Edited by Richard M. Bird and Jorge Martinez-Vazquez
Chapter 6: Taxing the small: Fostering tax compliance among small enterprises in developing countries
Revenue mobilization in developing countries is challenging and especially so when it comes to generating taxes from small enterprises. This represents a conundrum for policymakers and tax administrators. On the one hand there is a compelling need for revenues to meet spending and social objectives including some semblance of fairness in taxation. At the same time it is widely recognized that in many countries the cost of revenue mobilization from (at least some) small firms – including both administration and compliance costs – exceeds revenue potential. So even if policymakers decide to seek to tax small enterprises, the tax administration may have little enthusiasm for diverting resources from other seemingly more productive uses to enforce taxation of the small. Defining a “small” business is problematic. In the US, the Small Business Administration includes some manufacturing firms with up to 1500 employees in their definition of a small business. The World Bank (2007), on the other hand, defines micro firms as generally having less than 10 employees, small firms as having 10–49 employees (though there are exceptions) and medium-size firms at 50–249 employees (again with exceptions). In practice small firms can be defined broadly by some of their common characteristics and this is the approach we follow in this chapter without a specific attempt to define small. Our discussion applies less to small firms with strong connections to the formal sector and with solid accounting practices.
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