## The Optimal Turnover Threshold and Tax Rate for SMEs

_IMF Working Papers, May 7, 2019_

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## Bibliographic details
- Authors: Feng Wei, Jean-François Wen
- Published: May 7, 2019
- Series: IMF Working Papers

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### Summary
- Presumptive income taxes in the form of a tax on turnover for SMEs are pervasive to reduce compliance and administration costs.
- The paper analyzes 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 turnover exceeds a threshold.
- The authors 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; first-order conditions for welfare maximization are interpreted to identify key margins and the model is simulated in a calibrated version.

### Model and methods
- Agents choose labor allocation between formal and informal sectors.
- Formal income faces either:
  - corporate income tax (rate unspecified here), or
  - turnover tax (rate unspecified here) when turnover is below/above a threshold (threshold unspecified here).
- The paper derives the private sector equilibrium as a function of three policy parameters: corporate income tax rate, turnover tax rate, and threshold.
- Social welfare is maximized taking private behavior as given; first-order conditions are used to interpret policy margins.
- A calibrated simulation of the model is performed (calibration details not provided on this page).

### Key findings and analytical insights
- The first-order conditions for welfare maximization identify the key margins that determine optimal policy (margins not enumerated on this page).
- The calibrated simulations are used to determine optimal configurations of:
  - corporate income tax rate,
  - turnover tax rate,
  - turnover threshold for SMEs.

### Policy implications and recommendations
- Presumptive turnover taxes can reduce compliance and administration costs for SMEs.
- Optimal policy design requires balancing corporate income tax rate, turnover tax rate, and the turnover threshold, accounting for labor allocation between formal and informal sectors.
- Welfare optimization depends critically on private responses to the three tax policy parameters; policymakers should use calibrated models to inform thresholds and rates.

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2019/05/07/the-optimal-turnover-threshold-and-tax-rate-for-smes-46838_