Seminar Vol. 156

Title: Formality Avoidance: Evidence from Notches in China's Value-Added Taxes

Speaker: Haishan Yuan, The University of Queensland 

Time: May 14th, 2019 13:30–15:00

Venue: Conference Room 106B, Zhonghui Building (IESR, JNU College of Economics)

About the speaker:

Haishan Yuan is an Assistant Professor of Economics at The University of Queensland (Australia), and a Research Affiliate at the Tax and Transfer Policy Institute, Australian National University. He obtained a Ph.D. in Economics from the University of Martland, College Park in 2014. Haishan Yuan's primary research interests are in political economy, development economics, public economics, and applied microeconometrics. His work has appeared in such journals as American Economic Journal: Applied Economics, Journal of Development Economics, Economics Letters, and American Law and Economics Review.

Abstract:

Under China's value-added tax (VAT) system, firms with revenue above a certain threshold are mandated to register as a general VAT payer. Small (non-general) firms are restricted from claiming VAT credit from the input and issuing VAT invoices, but they are subject to lower tax rates. Using a novel administrative data set, we find substantial bunching just below the revenue cutoffs, which suggests that marginal firms refrain from formalizing in the VAT system by lowering their reported revenue. Among manufacturing firms, areas with a larger share of small firms exhibit a greater degree of bunching just below the registration threshold. We do not find a similar pattern for trading companies. Our results suggest that formality avoidance by small firms have important implications for the practical implementation of VAT. Moreover, network externality in VAT formalization may be particularly significant among manufacturing firms.