Does tax registration increase profits?
A large number of firms in developing countries operate in the informal sector. It is often argued that informality lowers profits and growth, but is this true? A recent paper on Bolivia finds that formality leads indeed to higher profit - on average. However, distinguishing between firms of different sizes shows that it is only mid-sized firms that stand to benefit from formality, whereas both smaller and larger firms suffer.
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For many small- and micro-level enterprises in developing countries, the answer to the question I think, is No. This is because business registration in those countries are very bureaucratic and time-consuming, and the fees are plentiful.
For medium-level enterprises, formal business and tax registration helps increase profit because the owners and managers of such enterprises can concentrate on their business, and worry less on extortion and harrassment by tax and other govt. bureaucrats.
Posted by: Nonoy Oplas, Philippines | Apr 1, 2008 2:39:22 AM
I think another reason may be that business registration also leads to some increased costs to the enterprise such as bookkeeping, welfare, and increased wages. Not to mention lost time and money (read : bribes) trying to get your business permit!
Posted by: Ari Tamat | Apr 11, 2008 1:05:16 AM