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The Optimal Turnover Threshold and Tax Rate for SMEs

Feng Wei and Jean-Francois Wen

No 2019/098, IMF Working Papers from International Monetary Fund

Abstract: 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.

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 (search for similar items in EconPapers)
Pages: 34
Date: 2019-05-07
New Economics Papers: this item is included in nep-ent, nep-iue and nep-pbe
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Handle: RePEc:imf:imfwpa:2019/098