What You Do (and What You Don’t) Get When Expanding the Net - Evidence from Forced Taxpayer Registrations in South Africa

Abstract

A significant share of firms in developing countries is not registered for income taxation. Expanding the tax net is a priority for many governments, but most formalization policies proved relatively ineffective in bringing firms into the tax net. We show that snapshot-synchronizations of the business tax and the commercial registry in South Africa led to a large-scale expansion of the South African business taxpayer net. While the targeted non-compliers are one of the fiscally most valuable segments of unregistered firms, we document that the interventions resulted in relatively little additional tax revenues, owing to entities’ weak post registration tax compliance and small firm size. Additional analyses suggest that the snapshot-synchronizations significantly reduced firms’ tendency to late register for business tax purposes, but did not trigger genuinely new voluntary business tax registrations. Our results highlight that the per-entity gains of formalization measures are small and must be carefully balanced against costs.