Enrico Miglino (Bank of Italy)
Giacomo Roma
Regulation often relies on size thresholds to determine the applicable legal and tax regime. Using data on the universe of Italian firms, this paper estimates the costs of firm growth by measuring the extent to which firms bunch just below such thresholds in order to avoid more burdensome rules. We first identify all the rules defined in terms of revenues, assets, and employment that generate bunching. We then embed the estimated bunching in a profit maximization model and estimate a behavioral elasticity specific to each underlying variable, leveraging directly observable costs to calibrate the model. Finally, we combine the estimated elasticities with the observed bunching at each threshold to quantify the costs of all regulations. The largest costs, relative to average value added for firms located near the threshold, are associated with the loss of a flat-tax regime for the self-employed, followed by the loss of simplified bookkeeping and quarterly VAT settlement, the mandatory appointment of a board of statutory auditors, and the increase in worker protections in the event of dismissal.