different forms of such simplified taxation approaches in encouraging formalization have been widely discussed (Bodin and Koukpaizan 2008, IFC 2009). A major concern is the strategic behavior around eligibility thresholds which create a disconnect between the general tax system and special regimes (Bird and Wallace 2004, Engelschalk 2004). Another concern is that preferential treatment or higher level of tolerated evasion by small businesses in combination with low effective tax rates for large businesses, which typically benefit from a range of special provision to encourage investment, may result in and inverted U-shaped pattern of the tax burden, potentially placing medium-sized business at a competitive disadvantage (Gauthier and Gersovitz 1997; Gauthier and Reinikka 2006).

Country practices range from subjecting micro and small businesses to standard income and value-added tax obligations, to simplified assessments on presumed income, all the way to a complete exemption from income tax obligations. Arguably, the most common approach in developing countries, as well as in a range of OECD economies, is to offer the option of applying simplified presumptive tax regimes to micro and small business (ITD 2006).<sup>4</sup> These simplified regimes, typically rely on turnover as a presumptive tax base, though several countries have opted for different approaches such as indicator and asset based instruments (Loeprick 2009, Memon 2010). In light of the multiplicity of design options available to policy makers and administrative solutions applied by tax administrations globally, a better understanding of their effectiveness in widening the tax base, preserving fairness and mitigating abuse has relevance beyond the academic discourse. Yet, evidence of the impact of targeted tax policy and administrative reforms on small business behavior is in short supply, particularly in developing economies.<sup>5</sup> The most relevant assessments of the effect of introducing a simplified tax regime study a tax policy reform for small businesses in Brazil. Expanding earlier work by Monteiro and Assuncao (2006), Fajnzylber et al (2010) find a significant local effect of the introduction of the simplified turnover based tax regime (‘SIMPLES’) that was introduced in November 1996 on the registration and resulting performance of small businesses. To our knowledge, Fajnzylber et al (2010) provide the first set of robust estimates illustrating a beneficial impact of tax reforms geared towards micro and small enterprises (MSMEs) on formalization and firm performance. However, this analysis is limited to estimating the benefits of the Brazilian reform based on survey data, raising concerns about the reliability of self-reported compliance behavior and, notably, not offering the possibility to capture potential abusive behavior in response to the reform.

The strategic response by businesses and individuals to tax policy thresholds has been investigated in a number of studies examining, for instance, taxpayer bunching around kinks in the United States (Saez 2010) and Danish income taxes (Chetty et al 2011). Kanbur and Keen (2014) provide a theoretical framework to analyze the complex link between the level of tax thresholds and compliance behavior, suggesting that higher evasion risks may justify higher thresholds. Looking more specifically at

> 4 Typically, but not necessarily defined by the VAT threshold; Several OECD countries operate presumptive regimes. Weichenrieder (2007) provides a comprehensive summary of OECD country practices.

> 5 Empirical research is limited; likely the result of both the relatively small contribution of this segment to official output numbers and the scarcity of reliable centralized information on small business activity. See also Bruhn (2011).

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