Presumptive Taxation: Revenue and Automatic Stabilizer Aspects

IMF Working Papers, August 1, 1993

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Presumptive Taxation: Revenue and Automatic Stabilizer Aspects

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Bibliographic details

• Authors: S. Nuri Erbas
• Published: August 1, 1993
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451960693.001

Overview

• Presumptive taxation is used in many countries to tax hard-to-tax activities and reduce evasion.
• The paper assesses whether presumptive taxation can raise revenue and whether it undermines macroeconomic stability by lacking the automatic stabilizer properties of progressive income taxation.
• Two simple models are developed; one model’s relevance to presumptive excise taxation in Pakistan is examined.

Research questions

• Could revenue be increased by adopting presumptive tax methods?
• Would presumptive income taxation contribute to macroeconomic instability because it lacks the automatic stabilizer property of standard progressive income taxation?

Models and key findings

• Two simple theoretical models suggest:
  • There is scope for increasing revenue under presumptive taxation.
  • Revenue increases under presumptive taxation do not necessarily undermine economic stability.
• The analysis considers the behavior of a risk-averse taxpayer, tax liability, aggregate tax liability, distortionary taxation, and the role of utility functions in determining taxpayer responses.

Relevance to Pakistan

• The first model is examined for its applicability to presumptive excise taxation in Pakistan.
• The paper discusses policy-relevant implications for countries using presumptive excise approaches to tax hard-to-tax activities.

Policy implications and considerations

• Presumptive taxation can be a tool to improve net revenue collection from activities subject to evasion or difficult to administer under standard income taxation.
• Adoption of presumptive taxation methods should weigh potential efficiency gains against distributional and stabilization considerations associated with deviating from progressive income taxation.
• Implementing presumptive taxation for global income is presented as a case worth considering in light of possible efficiency gains.

Subjects and keywords

• Subject: Income and capital gains taxes, Income tax systems, National accounts, Personal income, Presumptive tax, Revenue administration, Taxes
• Keywords: aggregate tax liability, distortionary taxation, Global, Income and capital gains taxes, income level, Income tax systems, net revenue collection, Personal income, Presumptive tax, presumptive taxation, revenue gain, risk-averse taxpayer, tax liability, utility function, WP

Presumptive Taxation: Revenue and Automatic Stabilizer Aspects — S. Nuri Erbas, August 1, 1993; Pages: 20; Volume: 1993; Issue: 069; Series: Working Paper No. 1993/069; DOI: https://doi.org/10.5089/9781451960693.001