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The Optimal Turnover Threshold and Tax Rate for SMEs
Author:
Feng Wei null

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Jean-François Wen null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 098
Language:
English
Publication Date:
07 May 2019
DOI:
https://doi.org/10.5089/9781498312295.001
ISBN:
9781498312295
ISSN:
1018-5941
Pages:
34
Keywords:
WP; tax rate; income tax; production function; Turnover Tax; Threshold; Corporate Income Tax; Tax Compliance; Informality; tax regimes firms choose; turnover tax rate; middle cost firm; profit-difference curve; presumptive regime; Sales tax; Presumptive tax; Compliance costs; Sub-Saharan Africa; Global
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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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund