A Presumptive Tax Regime to Shine Light on the Shadow Economy: A Scoping Study of Policy Design, Action, and Implications

Abstract

The study examines the utilisation of presumptive taxation, a popular policy to address the shadow economy. Theoretically, presumptive taxation benefits both small businesses and tax authorities because it reduces compliance and administration costs. Using a scoping review from journals published in 1975-2022, the study found 27 journals of global experiences of the presumptive tax regime and its implications. These journals are then synthesised and analysed to study the policy design and implementation of the presumptive tax in the observed countries. Three main insights are inferred from the scoping study. Firstly, while presumptive tax regime may or may not induce formalisation; it potentially entails unintended consequences because of introducing a separate tax system for small businesses. Secondly, designing the presumptive tax regime can be a difficult task to balance simplicity, equity, and efficiency, and also the presumptive tax regime likely becomes unstable and costly. Thirdly, the presumptive tax regime might even require more resources in its implementation. Therefore, the study suggests that those findings could inform policymakers about the costs and benefits of the presumptive tax regime in weighing policy options to address the problem of the shadow economy.

Keywords: shadow economy, presumptive tax, tax policy, small business.