The Effects of Presumptive Methods of Taxation on Revenue Mobilization in the Value Added Tax

Gohar Sedrakyan

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: Recent economic studies of presumptive taxation in the ECA region suggest negative effects of these tax modes on tax revenues mobilization. This study uses a three-stage methodology to estimate the effect of presumptive taxation on revenue mobilization for the VAT. First, we develop a new approach to estimate the true VAT potential tax base in an economy that includes presumptive taxation. Next, the paper assesses potential tax collections reflecting true taxable capacity and a tax effort index, suggesting the presence of inefficiencies in the tax system and sizable tax avoidance. Second, we use regression analysis to test for the scale of impact of presumptive taxation on VAT collections. Third, we use vector autoregression analysis (VAR) to analyze the bidirectional effect of VAT actual and potential collection and presumptive taxation modes in short and long-term perspective. For contrasting the variance of impact of presumptive taxation on VAT mobilization we use two different presumptive tax modes, simplified tax and presumptive payments, with different tax structures. We use data for Armenia for the numerical application of the analysis. Our findings reveal that, indeed, Armenia’s simplified tax has a significant distorting and diminishing effect on VAT collections. Meanwhile, presumptive payments have a positive impact on VAT mobilization.Length: 46 pages

Date: 2017-10
New Economics Papers: this item is included in nep-acc and nep-pbe
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