Wednesday, February 19, 2020
Emily Satterthwaite (Toronto) presents Toward a Signaling Account of Voluntary Value-Added Tax Registration at UCLA today as part of its Colloquium on Tax Policy and Public Finance hosted by Kirk Stark and Jason Oh:
In most jurisdictions, “small suppliers” (typically defined as businesses with annual turnover less than a specified “registration threshold”) are not required to register for, collect, or remit value-added tax (“VAT”). Registration thresholds typically are coupled with another VAT design feature: exempt small suppliers are offered the option to register. Existing studies have shown that, due to the ability to offer and claim credits for VAT paid on inputs, a small supplier’s likelihood of voluntarily registering grows stronger as it becomes more embedded in formal, VAT-registered supply chains. Recently, however, a novel explanation for voluntary VAT registration has surfaced: small supplier entrepreneurs may view voluntary registration as a way to secure reputational advantages. This paper explores the conceptual underpinnings of such an explanation for voluntary VAT registration through the lens of the costly signaling model (Spence 1973).
Like the use of education by a job-seeker to convey private information about her productivity to potential employers, voluntary registration by an entrepreneur may act as a signal of private information about the quality of her business to potential trading partners. In practice, this account has relevance for a particular subset of small supplier entrepreneurs: those for whom the dominant “formality chain effect” explanation for voluntary registration is inapplicable, but who nonetheless may seek to avoid markers of smallness. For this subset, I offer two ways that voluntary registration can work as a signal of private information about quality. First, it can convey information about the level of business sophistication or prior business experience of the entrepreneur. Higher-sophistication or higher-experience entrepreneurs may find business-related legal hurdles, such as VAT registration, less intimidating as compared to lower-sophistication or lower-experience entrepreneurs. Second, voluntary VAT registration can convey information about a small supplier’s expected growth rate, which also may serve as a proxy for quality. The paper concludes by considering the policy implications of a signaling account of voluntary registration.”