The Optimal Turnover Threshold and Tax Rate for SMEs

May 7, 2019

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Format: Chicago

Feng Wei, and Jean-François Wen. The Optimal Turnover Threshold and Tax Rate for SMEs, (USA: International Monetary Fund, 2019) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Presumptive income taxes in the form of a tax on turnover for SMEs are pervasive as a way to reduce the costs of compliance and administration. We analyze a model where entrepreneurs allocate labor to the formal and informal sectors. Formal sector income is subjected either to a corporate income tax or a tax on turnover, depending on whether their turnover exceeds a threshold. We characterize the private sector equilibrium for any given configuration of tax policy parameters (corporate income tax rate, turnover tax rate, and threshold). Given private behavior, social welfare is optimized. We interpret the first-order conditions for welfare maximization to identify the key margins and then simulate a calibrated version of the model.

Subject: Compliance costs, Corporate income tax, Presumptive tax, Revenue administration, Sales tax, Taxes

Keywords: Compliance costs, Corporate Income Tax, Global, Income tax, Informality, Middle cost firm, Presumptive regime, Presumptive tax, Production function, Profit-difference curve, Sales tax, Sub-Saharan Africa, Tax Compliance, Tax rate, Tax regimes firms choose, Threshold, Turnover Tax, Turnover tax rate, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/098
Stock No:

WPIEA2019098
ISBN:

9781498312295
ISSN:

1018-5941

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