Job Market Paper
Misreport or Misallocation? Firms’ Responses and Welfare Implications of Size-Based Enforcement Policy
(with Tzu-Ting Yang and Hsing-Wen Han) [Draft coming soon!]
Abstract: How do firms respond to size-based enforcement, and what are the effects on tax revenue and production efficiency? We examine a size-based enforcement policy in Taiwan, where firms with annual revenues below 30 million New Taiwan Dollars (approximately 1 million USD) benefit from lower audit probabilities and simplified filing requirements. Using a combination of administrative self-reported tax returns and census data, we show that firms bunch at the eligibility threshold, with both real and reporting responses varying by industry. Firms in consumer-facing industries primarily engage in misreporting, while firms in business-facing industries reduce both actual production and reported figures. This distinction arises because business-to-business (B2B) transactions leave traceable paper trails, making misreporting more challenging compared to business-to-consumer (B2C) sales. Leveraging these findings, we estimate a model that incorporates production dynamics and a hockey-stick-shaped misreporting cost to quantify the responses of smaller firms. Structural estimation reveals a 1% increase in aggregate production but a 3.6% loss in tax revenue.
Conference Presentations: Policy Impacts Annual Conference 2024, IIPF 2024, Irish Public Economics Workshop 2024, UFIN 2024, Cornell Public Workshop 2023, Taiwan Economics Research Conference 2023, Annual Conference on Taxation 2023, Cornell Work-in-Progress 2023,
Upcoming: 118th Annual Conference on Taxation (2024 Nov), ASSA/AEA Annual Meeting 2025
Other Working Papers
Size-dependent Tax Audit Policy and Manufacturing Firm Dynamics in Taiwan
(with Jen-Kuan Wang) [Draft upon Request]
Abstract: This paper examines a Taiwanese size-dependent tax audit rule that allows firms with annual revenue below a certain threshold to simplify the tax-filing process and be exempt from tax audits. We aim to quantify the importance of considering the policy’s distortionary effects on firm dynamics. Using manufacturing census data, we observe that firms decelerate their revenue growth rates as they approach the policy threshold, with labor inputs being more flexibly adjusted than capital in response to the policy. Moreover, this slowdown pattern is more pronounced for younger firms. On the extensive margin, we find that the share of new entrants below the threshold is significantly higher. We employ a firm dynamics model in which firms grow through frictional capital accumulation and flexible labor adjustments, making entry and exit decisions based on expected continuation values. To account for the differences between young and mature firms, the model allows firms to learn about their true ability over time. Simulation results confirm the model’s capacity to replicate the distorted firm size distribution observed in the data. Additionally, we find that a static model understates the policy’s negative impact by 23%, highlighting the importance of firm dynamics when evaluating size-dependent tax policies.
Conference Presentations: Taiwan Economics Research Conference 2024
Corporate Income Tax, Tax Avoidance, and Efficiency: Evidence from Taiwan
(with Luming Chen and Hsing-Wen Han) [Draft coming soon!]
Upcoming Presentations: 118th Annual Conference on Taxation (2024 Nov), SEA 94th Annual Meeting
The Effect of Compensation on Turnover: Evidence from Employer-Employee Administrative Data
(with Tzu-Ting Yang, Hsing-Wen Han, Hao-Chung Li, Wen-Chieh Lee) [Draft coming soon!]
Working in Progress
Pricing Frictions, Tax Incidence and Welfare: Evidence and Theory
(with Yeliz Kaçamak,Eleanor Wilking) [Draft coming soon!]