Presumptive Taxation and Equity: Evidence from the Ethiopian Informal Sector

Abstract

Presumptive tax has become a popular way of taxing businesses operating in the informal sector in middle- and low-income countries. The introduction of the presumptive tax system in Ethiopia in 2002 was intended to widen the tax base by bringing more informal sector operators into the tax net. However, the unintended consequences of its introduction were not adequately scrutinised, and it has been a source of criticism and complaints due to its alleged unfairness and lack of clarity in its implementation. A simple imposition of the presumptive tax upon the informal sector, without considering its complexity and the diversity of its actors, might have various negative consequences. In particular, it would likely compromise both horizontal and vertical equity. This study examines the issue empirically, exploring the equity implications of the presumptive tax system to tax the informal sector in Addis Ababa. The informal sector receives limited attention from either policymakers or researchers, and, prior to this research, we had no evidence on the characteristics of informal micro enterprises and the equity implications of Ethiopia’s presumptive tax system.