Threshold-dependent tax enforcement and the size distribution of firms: evidence from Germany

Abstract This paper investigates firms’ responses to threshold-dependent intensity of tax enforcement. We use administrative return data over the entire population German firms and exploit industry variation in firm size thresholds applied by administration. In our setting, each threshold marks a considerable spike audit hence should create strong incentives bunch below threshold. However, we find no such effect large sample analysis. attribute this empirical observation optimization costs, particularly costs associated with operational implementation management information costs. Our adds emerging field studies on potential distortions created regulation. The findings are also relevant for policymakers, as they suggest that specific design policies might allow governments increase efficiency audits without distorting distribution.