Firm Formalization in Bangladesh: Directions for Research and Policy Raj Chetty (Harvard University and IGC) Mushfiq Mobarak (Yale University and IGC) Aminur Rahman (World Bank Group) Monica Singhal (Harvard University and IGC)

Background Both the Finance Minister and the National Board of Revenue have publicly expressed that increasing the number of taxpayers in Bangladesh is a key priority The Finance Minister has stated a goal of reaching 10 million taxpayers in major newspapers A first step in this process is to get individuals and firms appropriately registered, but this can be challenging In this presentation we will: Present results from a survey of firms in Bangladesh Discuss implications for tax policy and directions for research collaboration

Data The World Bank conducted a survey of firms in 2010 designed to examine firm informality (N=1724 total; N=431 for Dhaka) Most variables are self-reported by firms; nevertheless, a number of patterns in the data are quite striking Summary statistics on reported formality status: % of firms with a Trade License 87% % of firms with a TIN 47% % of firms with a VAT License 34%

TIN and Firm Outcomes We observe significant positive associations of having a TIN (controlling for other firm characteristics) with: Having a bank account and having an account in the business name Having a loan from a government or private bank having a sign, having goods grouped appropriately, shelves fully stocked, no dust/dirt, and well-lit All of these observable characteristics are positively associated with profitability

TIN and Tax Outcomes

Benefits of Administrative Data Surveys of firms must rely (for the most part) on firm self reports This may be particularly problematic when looking at tax outcomes There are a number of questions on formalization that could be examined with existing administrative data on tax registrations and filings: How accurate are firm self reports on formality status and tax payments? Extent of “overformalization” Matching of firms in individual income tax and VAT data to check consistency of information provided

A Note on “Overformalization" We have focused so far on the policy problem of getting firms to formalize There may be another, less recognized problem: “overformalization” Discussions with officials in Bangladesh suggest that it is quite common for a firm to have multiple TINs

Proposal for Interventions The results of the baseline survey suggest that formalization may be good for tax revenue and for firm outcomes The results also indicate several possibilities for encouraging firm formalization: Providing firms with information on the process of getting formalized Assisting firms with the process of becoming formalized Subsidizing firms to get formalized De Mel, McKenzie, and Woodruff (2010) find that cash incentives are successful in getting firms to formalize in Sri Lanka Open question: Could such a policy actually produce a net return for the government?

Proposal for Interventions We propose randomizing these interventions among a selected sample of firms in Dhaka We would then work closely with a few associated tax offices to track firm formalization and subsequent tax payments. Firm outcomes would be measured in a follow up survey. The project would generate rigorous quantitative evidence on the effectiveness of informational, procedural or financial interventions on: The propensity of firms to formalize Tax revenues generated from those firms The results would be informative for the stated policy goals of the NBR and the Finance Ministry

Concluding Thoughts Our research team would be very interested to collaborate with policymakers in Bangladesh, particularly the National Board of Revenue, on this project or on other tax related programs Analysis of administrative data which could be mutually beneficial Working with you to build in research components to ongoing tax reforms (VAT reforms, e-governance initiatives) We welcome your thoughts. Thank you.