Small Firm Growth and the VAT Threshold : Evidence for the UK

Specifically, the probability of bunching in the current year, both below and above the notch, is conditioned on the growth rate of the choice variable from the previous year. [...] Second, this specification cannot separately identify the effects of a change in the position of the threshold from the effect of the level of turnover 10In the working paper version of Almunia and Lopez-Rodriguez (2018), there was some graphical analysis of firm growth around the LTU threshold. [...] We use the turnover from the CT600 returns, rather than from the VAT returns, for the obvious reason that we want to study the behavior of firms not registered for VAT, as well as those that are, and turnover data for the former group of firms is only available from the CT600 returns.18 The data for cost are also from CT600, and include the cost of intermediate inputs and labour. [...] First, looking at panel (a), we see that depending on the level of the VAT threshold, actual and counterfactual growth are the same until the point at which turnover enters the window of £20,000 around the threshold, at which point the firm 22This initial value is chosen to be the largest one such that the initial turnover of the firm is not affected by the smallest VAT threshold in our simulation. [...] The figure has the same interpretation as Figure 3: on the horizontal axes, we have the difference between actual turnover in t − 1 and the VAT threshold in that year, normalized turnover, and on the vertical, we have the turnover and cost growth rates.