Do Taxes on Large Firms Impede Growth? Evidence from Ghana
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Many developing countries pursue policies that treat large and small firms
differently. For example, large firms may be subject to a value added tax while
small firms are explicitly exempted. Moreover, governments often find it
impractical to collect taxes from the smallest enterprises; this may increase the
tax burden for larger firms, whose compliance can be enforced. Such policies
clearly affect the size distribution of firms. But how great is the impact on macro
variables? How large are the resulting inefficiencies? And what are the dynamic
effects on capital accumulation and economic growth? This paper uses a dynamic
general equilibrium variant of the Lucas (1978) span-of-control model to address
such questions. The model is matched to data from the Ghanaian manufacturing
sector. As a policy experiment, alternative tax and regulatory regimes are
compared. The model shows that a policy disproportionately penalizing large
firms can reduce output by nearly one-half, compared with an alternative policy
regime in which all firms face the same taxes and regulatory costs.