The Effect of Complex Tax Administration on Small Businesses

Project: Research

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Description

We propose to examine whether sales tax complexity affects the number of small businesses that operate in a locality. We measure complexity as locales having separate administrators for county and municipal sales taxes. We study this question in the Alabama restaurant industry, as counties and municipalities in Alabama can choose to locally administer, have the state administer, or contract with a third-party to administer the county and local sales taxes. Academic research and professional commentary suggest that the incremental compliance costs from facing multiple sales tax administrators can be considerable, especially for small businesses, given the fixed cost component of compliance activities. Echoing this perspective, we posit that more complex local sales tax administration regimes will predict fewer restaurants operating in an area, and that these effects are likely more severe for small restaurants. Our proposal would provide evidence on the impact of locally dictated dimensions of tax complexity on the entry and survival of small businesses. Our findings could also be valuable to the Hong Kong debate regarding the possible implementation of a goods and services tax, as well as the debate on proposed changes to the Hong Kong Inland Revenue Ordinance that would increase the complexity of Hong Kong’s tax system. 

Detail(s)

Project number9043754
Grant typeGRF
StatusActive
Effective start/end date1/01/25 → …