Do Taxes on Large Firms Impede Growth? Evidence from Ghana

Many developing countries pursue policies that treat large and small firmsdifferently. For example, large firms may be subject to a value added tax whilesmall firms are explicitly exempted. Moreover, governments often find itimpractical to collect taxes from the smallest enterprises; this may increase thetax burden for larger firms, whose compliance can be enforced. Such policiesclearly affect the size distribution of firms. But how great is the impact on macrovariables? How large are the resulting inefficiencies? And what are the dynamiceffects on capital accumulation and economic growth? This paper uses a dynamicgeneral equilibrium variant of the Lucas (1978) span-of-control model to addresssuch questions. The model is matched to data from the Ghanaian manufacturingsector. As a policy experiment, alternative tax and regulatory regimes arecompared. The model shows that a policy disproportionately penalizing largefirms can reduce output by nearly one-half, compared with an alternative policyregime in which all firms face the same taxes and regulatory costs.