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Working Paper Summaries (WP/93/55 - WP/93/95)
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Summary of WP/93/69: “Presumptive Taxation: Revenue and Automatic Stabilizer Aspects”

Author(s):
International Monetary Fund
Published Date:
January 1994
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This paper examines two questions that arise when presumptive taxation is considered as an alternative to standard statutory taxation. First, could net revenue (revenue net of collection costs) be increased under presumptive taxation relative to standard taxation? This question is considered in the context of a microeconomic model of income tax evasion that examines the constraints of the bargain between the taxpayer and the tax collector. The model shows that, within certain limits, it is feasible to increase revenue with presumptive tax methods. Although not intended as a detailed case study, the model also helps to explain the obstacles encountered in recent efforts to implement presumptive excise taxation in Pakistan.

Recent studies emphasize that presumptive taxation can lead to greater efficiency. In addition, it is argued that, unlike standard progressive income taxation, presumptive taxation of global income would not act as an automatic stabilizer because tax liability would be determined ex ante. This leads to the second question: Would the adoption of presumptive taxation of global income necessarily contribute to macroeconomic instability? With a rational-expectations macroeconomic model, it is shown that standard progressive income taxation acts as an automatic stabilizer only under rather restrictive assumptions. Therefore, although presumptive taxation does not have the automatic stabilizer property, in general, adopting presumptive taxation in lieu of standard taxation need not be destabilizing. The paper concludes that presumptive tax methods represent both a means to determine a minimum tax liability for hard-to-tax economic activities and an efficient form of global income taxation.

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