liabilities, which is estimated from the government’s presumptive tax code and ESS data on business annual turnover and activity type. The effective tax rates using self-reported data represent the tax burden based on what businesses claim to have paid, while the imputed effective tax rates represent what the tax burden would be using the tax code.

The self-reported tax payment in the ESS data measures the taxes paid on income and profits. It is possible that the information provided by respondents could include the _turnover tax_ , which is different from the presumptive tax that businesses pay instead of the VAT as discussed in section 2. This means that the self-reported tax payment could overestimate the presumptive tax payment if it also includes the _turnover tax_ . The analysis compares the self-reported tax payments on income and profits with the imputed presumptive tax liabilities using the tax code, keeping in mind that the self-reported payments may overestimate the presumptive tax because it could include payments for the _turnover tax_ .<sup>15</sup> The imputation method makes the following assumptions. First, it assumes that there is 100% tax compliance. Second, because there are 99 different business activity types in the tax schedule, it is not always clear which tax rate should be applied for tax assessment. For example, since there is no specific rate for electricians, it is not clear whether they should be taxed as “electrical lift works and repair” or as “building contractors”, which has a different tax rate. There is also no clear business activity in the tax schedule for individuals who brew and sell local alcohol, so it is assumed that they are taxed as those in the general merchandise, trade, and grocery activity, which has an exemption threshold for incomes below 50,000 birr. The difficulty in determining the tax rates for each activity highlights how the Revenue Authority tax assessment teams could easily apply different rates for firms engaging in similar activities. Third, detailed information on business activities is required to impute the presumptive tax, but some businesses in the trade sector do not provide sufficient detail about which commodity it was trading in. For example, the tax rates are different for trading in cotton or chat versus trading in vegetables (see Appendix 1). This resulted in some trade enterprises which lacked information on the commodities they were trading in with missing values for the imputed tax liabilities.

# **5. Results**

# **_a. Effective tax rates by turnover quartile and sex of business owner_**

First to be estimated is the effective tax rate by turnover quartile using the self-reported method (panel 1) and imputed taxes (panel 2) in Figure 2. In the self-reported method (panel 1), the tax burden falls more

> 15 The reasons for excluding the _turnover tax_ in the estimation are because this paper focuses on the presumptive tax and there is also not enough information in the ESS data to distinguish locally sold goods and services provided by contractors, grain mills, and combine harvesters (which is charged 2% of turnover) and other services (which is charged 10% of turnover).

14