A presumptive or imputed tax is generally a proxy for the standard tax. It is applied when the tax base is too small or hard to verify, due to limited administrative resources, or improper accounting practices. According to a definition by Ahmed and Stern (1991), “The term presumptive taxation covers a number of procedures under which the ‘desired’ base for taxation (direct or indirect) is not itself measured, but is inferred from some simple indicators which are more easily measured than the base itself.” For example, in its most common application as a proxy for income tax, the tax liability is based on the presumed capacity to earn income, measured through indirect indicators, rather than on actual income. In this context, a presumptive tax is largely a tool that addresses administrative inefficiency (i.e. high cost per unit of revenue). It may reflect low revenue capacity of the taxpayer or high propensity to evade taxes. This implies that presumptive taxation is best used to reach the hard to tax sectors of the economy, such as the small business, agriculture or service sectors, self - employed, as well as sectors or cases, where compliance gaps are above the average. Presumptive tax aims at improving the efficiency of collection by targeting three groups of effects: a) Reducing taxpayers’ compliance costs; b) Reducing the administrative costs of compliance and enforcement management; and c) Bridging the way from informal to formal activities and from assessment based on indicators to self-assessment based on actual income. In practice, the relative weight of these objectives in the policy mix may vary substantially across countries according to the level of market and institutional development; the average quality of company management, and the capacity of the tax administration.
Presumptive taxes are among the oldest taxes. Earliest forms date back to the 18th century when assets were the major source of income. Back then taxes were based on measures of wealth rather than income: size or value of land and other assets, including number of doors and windows as an indicator of the value of residence and the living standards. Last two centuries witnessed profound changes in earning patterns, with increasing share of income and wealth generated through supplying labour, capital and fixed assets through the factor markets in return for wages, interest, dividends and rents. The emergence of the “social state” in the 20th century in turn raised the significance of equity considerations and drove the move to progressive taxation. In result, taxation evolved away from taxes based on measures of wealth towards taxes based on actual earnings in its various forms. On the other hand, equity objectives required globalization of income, i.e. taxing total income, rather than its separate components (the so called “scheduler” taxation). Furthermore, with the development of accounting, tax collection evolved towards system of self-assessment of liability and filing tax returns. The last decades of the 20th century marked certain departure from the principles of self-assessment and globalization of income. Wherever possible, taxes would be withheld at the source, while indicator-based presumptive taxation was brought back to active use. The driver of these new trends in tax collection is above all the fast expansion of the shadow economy around the world. The challenges of reducing tax evasion required that compliance and enforcement management distinguish better between different types of earnings and taxpayers and related risks and costs. Large taxpayer units became indispensable part of tax administration reforms in transition economies, while small taxpayer compliance and enforcement were addressed through various forms of imputed or presumptive taxation.
Presumptive taxation is a form of...
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