## _wp8754

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---

### Introduction — summary and scope
- Public finance experts typically conceive income tax as imposed on a well-defined and accurate measure of recorded income over a given period, normally a year.
- In practice, income tax assessment for large numbers of taxpayers in both industrial and developing countries is "presumptive"—legally defined on the basis of more appropriate indicators rather than precisely measured income.
- Purposes of presumptive methods:
  - Administrative expedient when records do not exist or cannot be audited.
  - Tools to pursue efficiency goals.
  - Tools to pursue equity goals.
- Historical shifts and incomplete transition:
  - Income taxation moved historically from presumptive indicators to taxation on incomes actually received; schedular taxes gave way to global income taxes; self-assessment and withholding at source became more common.
  - Changes were incomplete; many taxpayers—especially in developing countries—are still effectively taxed on presumed income rather than actual income.
- Luigi Einaudi’s efficiency concept:
  - Taxing on "average" income can create incentives to produce above average since marginal tax on excess would be zero; calculation of "average" returns can be administratively difficult.
- Key numeric and historical markers preserved exactly as in the source:
  - 1863
  - 1798
  - 1834
  - 1830
  - 1870
  - 1860s
  - 1923
  - 1943
  - 1950s and 1960s
  - 70 years ago
  - 60 years ago
  - 1924
  - Taxes on personal income account for only about 2 percent of GDP in developing countries.
  - Perhaps three-fourths of this revenue comes from wages and salaries.
- Paper composition:
  - Historical survey of income taxation.
  - Discussion of presumptive taxation (theory and practice).
  - Information on global use of presumptive taxes.
  - General conclusions and directions for further research.

### Background — use, classification, and empirical patterns
- Use and context
  - Presumptions are used in both developed and developing countries, especially where “hard-to-tax” taxpayers comprise a large fraction of the taxpaying population and administrative resources are scarce.
  - France cited as a developed-country example: the forfait system is used widely.
  - Degree of economic development influences choice and application: earlier-stage countries tend to apply “rough and ready” methods; countries with sectoral studies and appropriate indexes can estimate incomes more accurately.
  - Legal provisions alone often do not disclose extent or manner of application; practice depends on country circumstances and administrative resources.
- Classification of presumptions (scope and rebuttability)
  - By scope:
    - Methods applied generally to entire sectors as a substitute for accounts (forfait, standard assessment).
    - Methods applied only when taxpayers omit to file returns or are audited (from activity-specific profitability indexes to crude single-factor presumptions such as total assets).
  - By rebuttability:
    - Irrebuttable presumptions: taxpayer not allowed to prove actual income was lower.
    - Rebuttable presumptions: taxpayer may prove actual income was lower (generally the rule).
  - Economic bases:
    - Net wealth, value of assets, gross receipts, visible signs of wealth, multifactor indices (forfait and standard assessment).
- Presumptions based on net wealth or particular assets — practices and limits
  - Common practice: compare beginning-of-year and end-of-year net worth when books are nonexistent or inadequate; technical difficulties in valuation, inflation, and identifying owners limit use in developing countries.
  - Country examples and rules:
    - Argentina: amount of capital invested in the enterprise is one factor administration can use.
    - Chile: when information is insufficient, administration may presume income equal to 10 percent of the value of total tangible assets.
    - Argentina (1968): federal tax on agricultural land creditable against income tax; served as a minimum income tax on agricultural income; repealed in the early 1970s.
    - Chile: farmers who do not keep adequate account books are presumed to have an income equal to 10 percent of the assessed value of their farm; this presumption is irrebuttable.
    - Colombia (since 1974): all taxpayers, individuals and companies, are presumed, without possibility of rebuttal, to have incomes equal to at least 8 percent of their net wealth; Government may reduce the Level of the presumption for a region or the country as a whole when abnormal economic conditions or natural catastrophes dictate.
  - Revenue effect (Colombia): Data for 1984, available only for companies, show that 13 percent of company tax collections stemmed from the combined application of this presumption and another presumption based on gross receipts established in 1983; 87 percent of collections were based on actual incomes.
  - Technical problems: bearer-share ownership, foreign currency, valuation in inflationary settings, incentives to increase liabilities, potential discrimination across asset owners.
- Presumptions based on gross receipts — design and limitations
  - Francophone African countries: minimum corporate income taxes evolved from fixed lump-sums to minimum taxation equal to a percentage of gross receipts (ranges given from less than 0.5 percent to 2 percent).
  - Sometimes both lump-sum and gross-receipts minimum taxes coexist; corporations pay the larger amount.
  - Interpretation example: if corporate tax rate = 40 percent and minimum tax = 1 percent of gross receipts, authorities act as if all corporations earn minimum net taxable income equal to 2.5 percent of gross receipts.
  - Colombia (1983): general presumption of net income based on gross receipts; Law presumes net income amounts to at least 2 percent of gross receipts (except main sources of income are wages and salaries).
  - Limitations:
    - Concealment of gross receipts is a favored method of tax evasion; gross-receipt presumptions mainly affect taxpayers who cannot easily conceal receipts (e.g., large corporations).
    - Corporations with genuine losses and those manipulating profits may both pay the same tax if turnover is the same.
    - For small enterprises that already conceal receipts, turnover-based presumptions may have little consequence.
    - Presence of general sales taxes creates double incentive to conceal gross receipts (evade both sales tax and income tax).
- Presumptions based on visible signs of wealth — mechanisms and problems
  - Applied to individuals; approaches vary from broad administrative discretion (Brazil, Peru) to statutory specification assigning income equivalents to signs (France, Italy, francophone Africa, Spain until 1978).
  - Rationales: detect unreported income and ensure taxpayers with luxurious lifestyles pay an appropriate amount of tax—an equity or “public morality” objective.
  - Practical difficulties: administrator choice of signs and income equivalents, statutory inflexibility, cautious application primarily when other methods fail; useful in assessing illegal incomes.
- Estimated assessment methods for “hard-to-tax” taxpayers
  - Forfait (France) — requires:
    - Technical resources for detailed profitability studies by activity.
    - Adequate number of tax officials to verify taxpayer information on business characteristics.
    - Strict supervision and adequate pay for officials because forfait involves negotiations between officials and taxpayers; lack of these prerequisites creates strong incentives for corruption.
  - Israeli tahshiv (standard assessment) — emphasizes objective factors and indexes (physical inputs, number of employees, types of services, equipment, location, work schedules, number of workers); more than 80 tahshiv developed after detailed research and sector consultation.
  - Criticisms and incentives:
    - Tahshiv may be claimed by taxpayers with incomes above averages to avoid bookkeeping disclosure.
    - Precise-factor reliance can turn income tax into a tax on those factors, motivating taxpayers to alter business characteristics to lower assessments.
  - Simpler examples and outcomes:
    - Ghana (early 1960s): standard assessment produced fixed lump-sum payments based on averages from a few randomly selected taxpayers; in practice most taxpayers paid prescribed lump-sums.
    - Farmers often assessed on potential land output; professionals sometimes assessed a minimum income tax based on average potential earnings.
  - Administrative trade-offs and scale:
    - Many developing countries struggle to estimate incomes of “hard-to-tax” taxpayers, acute in earlier-stage development countries with few taxpayers taxable on actual incomes.
    - Example: in one such country only 14 taxpayers out of the 850 largest businesses were able to submit acceptable income statements in 1985.
    - Portugal (1983): 35,003 enterprises paid profits tax on actual incomes in 1983, while approximately 340,000 businesses paid tax on a presumptive base; the 35,000 enterprises that paid on actual incomes accounted for three-quarters of total profits tax collections.
  - Administrative objective: minimize involvement with low-yield taxpayers while maintaining efforts to collect some tax from all enterprises.

### The administrative case for presumptive taxation — arguments, rationale, and conclusions
- Criticisms summarized (Richard Bird — Colombia):
  - Difficulties in selecting the factors that should form the base of a presumptive income tax (gross sales, value of property, number of employees, rent, inventory).
  - Likelihood that the presumptive tax will be shifted in an arbitrary and haphazard manner.
  - Possibility that the use of presumptive techniques will discourage the keeping of books and records.
  - Bird’s summary judgment: “any presumptive tax would have to be highly complicated in order to be effective, and would very likely be as difficult to administer fairly and effectively as the regular income tax.”
- Administrative rationale in favor:
  - Developing countries require simple methods to tax the “hard-to-tax” groups that now escape income taxation.
  - Presumptive methods cannot be exact but may be preferable to ad hoc judgmental assessments using unspecified criteria.
  - “Taxation is the act of the possible and simple presumptive methods are a needed tool in the tax administrator’s arsenal.”
  - Presumptive taxes require considerable administrative input if they are to be based on realistic and objective criteria.
  - Objection: resources spent to design and administer a good presumptive system might be better used to improve modern income taxation. Counterpoint: in many cases the modern approach is not possible.
- Efficiency implications and policy potential
  - A well-designed presumptive approach can in some aspects be superior, from an efficiency point of view, to one that relies strictly on actual incomes.
  - Mechanism: when categories are taxed on an average estimate of income, any excess over that average is implicitly taxed at a zero rate; individual responses to this incentive could yield efficiency gains.
  - Precise design and implementation are left for future research.
- Authors’ synthesis and hope
  - Presumptive taxation is important but under-studied.
  - Widely used for administrative reasons to tax incomes otherwise difficult to reach.
  - Presumptive incomes serve as proxies for actual incomes.
  - The paper aims to stimulate renewed research into administrative, equity, and efficiency implications so more informed assessments of presumptive taxation’s role in modern tax systems can be developed.

*Source: _wp8754 - Introduction; 1. Background; 6. The administrative case for presumptive taxation methods (IMF working paper excerpt).*

### Introduction

### _wp8754 - Introduction

### Summary
- Public finance experts typically conceive income tax as imposed on a well-defined and accurate measure of recorded income over a given period, normally a year.
- In practice, income tax assessment for large numbers of taxpayers in both industrial and developing countries is "presumptive"—legally defined on the basis of more appropriate indicators rather than precisely measured income.
- Presumptive methods are most often an administrative expedient but can also be used to achieve efficiency and equity goals.
- Historically, income taxation moved from presumptive to "modern" methods as indicators of income were gradually replaced by income actually received; schedular taxes were replaced by global income taxes; self-assessment and withholding at source became more common.
- Changes in methodology never went as far as often assumed; many taxpayers—especially in developing countries—are still effectively taxed on presumed income rather than actual income.
- Luigi Einaudi articulated an efficiency concept of presumptive taxation: taxing on "average" income can create incentives to produce above average since marginal tax on excess would be zero. Calculation of "average" returns can be difficult administratively.
- Presumptive methods may improve horizontal equity by taxing professionals and the self-employed (for example, by establishing a minimum income) who are otherwise harder to reach than wage earners with withholding.
- Current experience shows presumptive methods require considerable administrative input if based on realistic and objective criteria; in many cases a "modern" approach is not possible.
- A combination of administrative, equity, and efficiency arguments supports further research into presumptive taxation.

*Key numbers and dates preserved exactly as in the source:*
- 1863
- 1798
- 1834
- 1830
- 1870
- 1860s
- 1923
- 1943
- 1950s and 1960s
- 70 years ago
- 60 years ago
- 1924
- Taxes on personal income account for only about 2 percent of GDP in developing countries.
- Perhaps three-fourths of this revenue comes from wages and salaries.

### I. Introduction (paper scope and purpose)
- Public finance scholars in the modern Anglo-Saxon tradition generally assume income tax is imposed on a well-defined measure of income earned in a year; many believe this is the only and universal method.
- The paper challenges that assumption by showing income taxes often are not applied to well-defined, precisely measured income—many are tailored or applied to broader categories using presumptive methods.
- Purposes of presumptive methods:
  - Administrative expedient when records do not exist or cannot be audited.
  - Tools to pursue efficiency goals.
  - Tools to pursue equity goals.
- The paper comprises four parts: a historical survey of income taxation; a discussion of presumptive taxation; information on global use of presumptive taxes; and general conclusions.

### II. Historical Background (major developments)
- Income taxation gained importance in the 20th century though several countries taxed income earlier.
  - United States: income taxes used during and after the Civil War starting in 1863; introduced in 1923 after constitutional amendment.
  - United Kingdom: income tax introduced by the Aid and Contribution Act of 1798.
  - German states: started in 1834 with Saxony.
  - France: evolved through reforms in 1830 and 1870.
  - Italy: product of unification in the 1860s.
- Four major historical changes in income taxation:
  1. Transition from income concepts based on general indices (value of land, standard of living, wealth, number of doors and windows, etc.) to taxation on incomes actually received.
  2. Change from "schedular" (separate taxation of categories like wages, interest, rent) to taxation of taxpayers' global incomes to facilitate progressivity.
  3. Movement toward self-assessment where individuals calculate and file their own total income and tax liability; alternative remains administration-determined assessments.
  4. Movement toward withholding at source; withholding introduced in the United States in 1943.
- Structural economic changes facilitated these shifts:
  - Increased proportion of income from sale of labor and leasing of wealth; transition from agricultural to industrial society.
  - Growing role of financial intermediation and large corporations separating savers from direct capital use.
  - Growing concentration of income generation in fewer, larger economic units; government and large corporations became major employers.
  - Spread of accounting practices.
- Social developments:
  - Growing demand for progressive taxation encouraged replacement of schedular taxes with global income taxes.
- Despite these trends, the shift from presumptive to actual income taxation was incomplete:
  - In developing countries the shift never went far; tax laws may be written for actual income but many taxpayers do not submit reliable accounts.
  - Taxable income levels frequently result from negotiations, guesses, or indices, sometimes influenced by bribes or political connections.
  - Even some advanced countries like France and Italy rely on presumptive concepts for part of their income tax system.
- Observation: there may be more taxpayers worldwide taxed on presumed concepts than on actual measured incomes.

### III. Reasons for Dissatisfaction with Modern Income Tax (categories)
- Recent dissatisfaction with current income taxation has generated interest in alternatives, including presumptive taxes. Reasons cluster into:
  a. Administrative difficulties
  - Determining actual income is often futile in many countries, especially developing ones.
  - Taxpayers who do not earn wages are often incapable of determining their own income precisely.
  - In practice, tax administrations frequently use presumptive criteria to approximate actual income.
  - Increased awareness of tax evasion and underground economic activities highlights limits of relying on bookkeeping.
  - When books exist, taxpayers may keep two sets: one for tax authorities and one for themselves.
  - Service-oriented economies and proliferation of small businesses complicate income determination even in advanced countries.
  - There is evidence tax evasion is a large and growing phenomenon in both industrialized and developing countries.
  b. Efficiency concerns
  - Policymakers worry about high tax rates' impact on work effort, saving, and entrepreneurship.
  - Recent studies suggest high marginal tax rates may have larger negative effects than previously thought.
  - Some economists advocate replacing income-based taxes with consumption-based taxes.
  - Reforms are reducing marginal tax rates in some contexts.
  c. Equity considerations
  - Tax evasion creates injustices between those who can evade taxes and those who cannot (often wage earners).
  - Modern income taxes generally exempt imputed income of assets (houses, land, jewelry, works of art), encouraging underutilization of assets.
  - Underutilization of land by rich landowners is a particular concern in developing countries.

### IV. Presumptive Taxes: Some Theory
- Presumptive taxation has received little theoretical attention; scant coverage in public finance textbooks and limited articles (especially in English).
- Presumptive methods may be adopted for distinct reasons: administrative convenience, efficiency, and equity.
- Administrative convenience examples:
  - Taxing small agricultural units, family businesses, professionals and independent contractors on a presumptive basis when accounting records are inadequate.
  - Example: applying average profit-to-sales margins for each category of small taxpayers to assess income tax (technical assistance recommendation for a low-income Latin American country).
- Efficiency concept (Einaudi):
  - Luigi Einaudi advocated an "optimum tax" based on "average income" for taxpayers with average hours, effort, risk, and technology.
  - Taxing on average income creates incentive to produce above average because excess is effectively taxed at zero marginal rate.
  - Einaudi's work predates modern optimal taxation theory; original work published in 1924.
- Alternative efficiency application:
  - Development economists advocate taxing potential value of land (most productive use) to counter underutilization by large landholders; administratively difficult and may conflict with administrative-convenience approaches.
- Equity concept:
  - Presumptive methods can promote horizontal equity by bringing self-employed and professionals closer to wage-earner tax compliance where withholding makes wages easier to tax.

### V. Experience with Presumptions of Income (introductory notes)
- Current experience shows presumptive methods require considerable administrative input to be realistic and objective.
- Objection: administrative resources for presumptive methods might be better used to improve modern income taxation based on actual income.
- Counterpoint: in many cases, modern approaches are not possible, making presumptive taxation a pragmatic alternative.
- Conclusion: administrative, equity, and efficiency arguments together justify more research into presumptive taxation.

*Source: _wp8754 - Introduction (IMF working paper section provided).*

### 1. Background

### 1. Background

### Use and context of income presumptions
- Presumptions are used to assess taxpayers in both developed and developing countries, especially where “hard-to-tax” taxpayers comprise a large fraction of the taxpaying population and administrative resources are generally scarce.
- France is cited as a developed country with a well-established system of income presumption: the forfait system is used widely.
- The degree of economic development influences the choice and application of presumptive methods: earlier-stage countries tend to apply “rough and ready” methods because they have few personnel qualified to study profitability and establish indexes; countries with sectoral studies and appropriate indexes can estimate incomes with a much higher degree of accuracy.
- Legal provisions alone often do not disclose the extent or manner of application of presumptions; actual practice depends on country circumstances and availability of administrative resources.

### Classification of presumptions
- Presumptions can be classified by scope:
  - Methods applied generally to entire sectors as a substitute for accounts (e.g., forfait, standard assessment).
  - Methods applied only when taxpayers omit to file returns or are audited (ranging from activity-specific profitability indexes to crude single-factor presumptions, such as total assets).
- Presumptions can be classified by rebuttability:
  - Irrebuttable presumptions: taxpayer not allowed to prove actual income was lower.
  - Rebuttable presumptions: taxpayer may prove actual income was lower. In general, rebuttable presumptions are the rule.
- Economic bases vary: net wealth, value of assets, gross receipts, visible signs of wealth, and multifactor indices (forfait and standard assessment methods).

### Presumptions based on net wealth or particular assets
- Several countries compare beginning-of-year and end-of-year net worth when books are nonexistent or inadequate; technical difficulties (valuation, initial and end-year net worth, expenditures) limit use in developing countries.
- Examples and specifics:
  - Argentina: amount of capital invested in the enterprise is one factor the administration can use.
  - Chile: when information is insufficient, administration may presume income equal to 10 percent of the value of total tangible assets.
  - Argentina (1968): federal tax on agricultural land creditable against income tax; served as a minimum income tax on agricultural income; repealed in the early 1970s.
  - Chile: farmers who do not keep adequate account books are presumed to have an income equal to 10 percent of the assessed value of their farm; this presumption is irrebuttable.
  - Colombia (since 1974): all taxpayers, individuals and companies, are presumed, without possibility of rebuttal, to have incomes equal to at least 8 percent of their net wealth; Government may reduce the Level of the presumption for a region or the country as a whole when abnormal economic conditions or natural catastrophes dictate.
- Revenue effect data (Colombia): Data for 1984, available only for companies, show that 13 percent of company tax collections stemmed from the combined application of this presumption and another presumption based on gross receipts established in 1983; 87 percent of collections were based on actual incomes.
- Technical problems: difficulty in identifying owners of bearer shares, foreign currency; valuation in inflationary settings; encouragement to increase liabilities; discrimination toward owners of certain assets.

### Presumptions based on gross receipts
- Francophone African countries pioneered minimum corporate income taxes initially as fixed lump-sum amounts; due to regressivity replaced in many countries by minimum taxation equal to a percentage of gross receipts (ranges given from less than 0.5 percent to 2 percent).
- In some countries both lump-sum and gross-receipts minimum taxes coexist; corporations pay the larger amount.
- Interpretation: minimum tax equal to a percent of gross receipts is equivalent to a simple presumption of income (presumed net income implied by converting minimum tax to net profit percentage). Example given: if corporate tax rate = 40 percent and minimum tax = 1 percent of gross receipts, authorities act as if all corporations earn minimum net taxable income equal to 2.5 percent of gross receipts.
- Colombia (1983): established a general presumption of net income based on gross receipts applicable to all taxpayers except those whose main sources of income are wages and salaries; Law presumes net income amounts to at least 2 percent of gross receipts.
- Limitations:
  - Concealment of gross receipts is a favored method of tax evasion in many developing countries, so gross-receipt presumptions mainly affect taxpayers who cannot easily conceal receipts (e.g., large corporations).
  - Corporations with genuine losses and corporations that manipulate profits may both pay the same tax if turnover is the same.
  - For small enterprises that already conceal receipts, introducing a presumption based on turnover may have little consequence.
  - Determining net wealth is often easier than checking gross receipts except for large corporations.
  - Presence of general sales taxes creates a double incentive to conceal gross receipts: to evade both sales tax and income tax.

### Presumptions based on visible signs of wealth
- Several countries include presumptions of income based on visible signs of wealth; these apply only to individuals.
- Approaches vary:
  - Broad administrative discretion (e.g., Brazil and Peru): administration empowered to presume incomes higher than reported based on visible signs and to decide which signs and income equivalents to use.
  - Statutory specification (e.g., France, Italy, several francophone African countries, and until 1978 Spain): signs of wealth described and each assigned an income equivalent (main and secondary residences, number of domestic servants, automobiles, yachts, private planes, race horses).
- Rationales evolved: initially to support additional income assessments where unreported income was suspected; later also used to ensure taxpayers with luxurious lifestyles pay an appropriate amount of tax—an equity or “public morality” objective.
- Practical difficulties:
  - When specified in general terms, administrators struggle to choose signs and income equivalents.
  - Statutory inflexibility can lead to unfairness.
  - Administrations apply these presumptions cautiously and mainly when other assessment methods cannot support additional tax.
  - Useful in assessing illegal incomes (e.g., racketeering, drug trafficking).

### Estimated assessment methods (for “hard-to-tax” taxpayers)
- Many developing countries and some developed ones apply estimation methods for “hard-to-tax” taxpayers (individual proprietorships, farmers, professionals).
- Forfait method (France) inspired other countries; successful implementation requires:
  - Technical resources to make detailed profitability studies by activity.
  - Adequate number of tax officials to verify taxpayer-provided information on business characteristics.
  - Strict supervision and adequate pay for officials because forfait involves negotiations between officials and taxpayers; lack of these prerequisites creates strong incentives for corruption.
- Practical experiences and adaptations:
  - Attempts to implement forfait-like systems without adequate resources produce flawed systems; lack of sectoral studies leads to subjective discussions and unrealistic assessments and corruption.
  - Israeli tahshiv (standard assessment) emphasizes objective factors and indexes (physical inputs, number of employees, types of services, equipment, location, work schedules, number of workers). Each tahshiv is prepared after detailed research and visits to representative samples; averages and factor relationships are discussed with sector representatives before issuance. More than 80 tahshiv have been developed.
  - Criticisms of tahshiv: taxpayers with incomes above the averages may claim lack of books to use tahshiv; heavy reliance on precise factors can turn income tax into a tax on those factors, motivating taxpayers to alter business characteristics to obtain lower assessments.
  - Tahshiv-inspired systems: Korea introduced a standard assessment along similar lines; other developing countries have tried with limited success.
  - Simpler departures from income taxation:
    - Ghana (early 1960s): standard assessment system produced fixed lump-sum payments for activities based on averages from a few randomly selected taxpayers; in practice most taxpayers paid only prescribed lump-sum amounts.
    - Farmers assessed on potential land output; professionals sometimes assessed a minimum income tax based on average potential earnings.
- Administrative trade-offs and scale examples:
  - Many developing countries have not satisfactorily solved how to estimate incomes of “hard-to-tax” taxpayers; this is acute in earlier-stage development countries where few taxpayers can be taxed on actual incomes.
  - Example: in one such country only 14 taxpayers out of the 850 largest businesses were able to submit acceptable income statements in 1985.
  - Middle-income countries seek estimation methods that do not divert excessive administrative resources from higher-yield work.
  - Portugal example (1983): 35,003 enterprises paid profits tax on actual incomes in 1983, while approximately 340,000 businesses paid tax on a presumptive base; the 35,000 enterprises that paid on actual incomes accounted for three-quarters of total profits tax collections.
- Administrative objective: minimize involvement with low-yield taxpayers while maintaining efforts to collect some tax from all enterprises.

*Source: _wp8754 - 1. Background*

### 6. The administrative case for presumptive taxation methods

### 6. The administrative case for presumptive taxation methods

### Arguments raised against presumptive methods (Richard Bird — Colombia)
- Bird concluded that no attempt should be made to employ presumptive income methods in Colombia because:
  - (1) Problems are encountered in selecting factors that should form the base of a presumptive income tax, i.e, whether to choose gross sales, value of property, number of employees, rent or inventory.
  - (2) The likelihood that the presumptive tax (which would not really be a true tax on net income but a tax on the factors on which the presumed income is based) will tend to be shifted in an arbitrary and haphazard marAiler.
  - (3) The possibility that the use of presumptive techniques will actually discourage the keeping of books and records.
- Bird’s summary judgment: “any presumptive tax would have to be highly complicated in order to be effective, and would very likely be as difficult to administer fairly and effectively as the regular income tax.” 1/

### Administrative rationale for using presumptive methods
- Need identified:
  - Developing countries require simple methods to tax the “hard-to-tax” groups that now escape income taxation.
- Nature and limitations:
  - Presumptive methods by nature cannot be exact, but may be preferable to ad hoc judgmental assessments using unspecified criteria.
  - “Taxation is the act of the possible and simple presumptive methods are a needed tool in the tax administrator’s arsenal.”
- Administrative input required:
  - Presumptive taxes require a considerable amount of administrative input if they are to be based on realistic and objective criteria.
  - Objection considered: If a country is willing to invest resources to design and administer a good presumptive system, why not spend that money to improve modern income taxes? Counterpoint: in many cases the modern approach to income taxation is just not possible.

### Summary and conclusions (authors’ synthesis)
- Observations about the topic:
  - Presumptive taxation is important but has attracted very little attention from public finance experts.
  - Presumptive taxation is widely used in many countries, both developing and industrial.
  - In most cases this approach has been followed for administrative reasons: to tax incomes which the tax authorities felt would be otherwise difficult to reach.
  - Presumptive incomes have thus been considered proxies for actual incomes.
- Efficiency implications:
  - A well-designed presumptive approach can result in a tax system that, in some of its aspects, could be superior, from an efficiency point of view, to one that relies on actual incomes.
  - Mechanism: when categories of individuals are taxed on the basis of some average estimate of the income that they produce, any excess over that average is implicitly taxed with a zero rate.
  - If individuals respond to incentives of this type, there could be efficiency gains from the use of presumptive taxes.
  - The precise design and implementation of such taxes is left for future research.
- Authors’ hope:
  - The paper aims to stimulate interest in an important but forgotten area so that, as knowledge of the administrative, equity, and efficiency implications of presumptive taxes increases, a more informed assessment of their potential in modern tax systems can be made.

*Source: _wp8754 - 6. The administrative case for presumptive taxation methods (excerpt).*

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