What Explains Bunching at VAT Thresholds? Evidence from Bulgaria
Kenneth Tester, University of Exeter
Abstract: Making use of a unique administrative data set for the period 2010-2020, consisting of the universe of administrative filings in Bulgaria, this paper investigates businesses' bunching responses to the VAT registration threshold. Importantly, it focuses whether these responses are real of a driven by evasion behaviour. It also investigates the extent to which businesses deliberately (but legally) break up to stay below the threshold. The results show that Bulgarian businesses respond strongly to the threshold. The evidence suggests that VAT evasion (defined as the presence of VAT-able businesses deliberating under-declaring sales) is a key incentive underlying the bunching response. Bunching differs across sectors, with the average firm shifting turnover between 4,350 and 810 BGN. We also investigate the extent that business respond by breaking up in smaller businesses in order to stay below the threshold.
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