calculated by dividing the tax liabilities by the turnover using two different measures of tax liabilities: the self-reported taxes and imputed taxes.<sup>2</sup> Estimating the effective tax rate is relevant because high tax rates could discourage businesses from registering and complying with payments. For example, a survey of informal and formal firms in Ethiopia found high tax rates to be a disincentive for informal firms to formalize and pay taxes (World Bank 2016). Similarly, a study in Pakistan showed that increasing tax rates resulted in formal firms to become informal (Waseem 2018), and in Brazil, lowering tax rates encouraged more firms to formalize (Rocha, Ulyssea, and Rachter 2018).

There are three key findings from this study. First, the effective tax rates for the smallest businesses are high because the tax-free threshold is not available for some subsectors. Using the tax code, the effective tax rates for businesses in the lowest turnover quartile are 4.3% of turnover compared to 1.5% for businesses in the highest quartile, using the most recent data, resulting in a regressive system. Second, the effective tax rates in the lowest quartile are higher for male businesses than for female businesses because the former tend to operate in sectors _without_ a tax-free threshold. Third, the effective tax rates for businesses in food and beverage services – a female-dominated sector, and in transit services – a male-dominated sector, are high due to the lack of a tax-free threshold for these sectors. Given the regressivity of the tax code, this paper conducts a policy simulation by estimating the tax burden of a hypothetical presumptive tax regime by exempting _all_ businesses with a revenue of 50,000 birr or less and taxing a fixed rate on turnover for businesses earning above the threshold. This paper finds that a fixed tax rate of 2.5 percent on turnover and exemptions for low revenue firms would be simpler for tax assessment and more progressive.

This paper makes a contribution to the literature in three ways. First, the literature studying the tax burden of the presumptive tax is limited because of the lack of disaggregated data and the low priority given by governments as aforementioned. Among the exceptions are empirical studies by: Waiswa et al. (2021), who find some regressivity in the recently reformed presumptive tax in Uganda; Semboja (2015), who shows there is regressivity within some turnover bands in Tanzania; and Engelschalk and Loeprick (2016), who examine the policy design of simplified tax regimes of micro and small businesses in transition economies and conclude that these regimes often do not adequately consider tax fairness. Using a _de jure_ analysis, Dube and Casale (2019) find the presumptive tax in Zimbabwe to be regressive with a particularly high tax burden for hairdressers, who are predominantly women. This paper builds on these studies by examining the equity and gender implications of the tax in Ethiopia. The explicit consideration of the different tax burdens on women and men in the Ethiopian context is important given that the activityspecific tax rates in the tax code and the gendered sectoral distribution of activities are likely to interact.

> 2 The literature that estimates the effective corporate tax rates uses turnover, gross profits, net profits, or pre-tax income in the denominator (see Bachas et al. 2023 for a review). This paper uses turnover because it is the tax base used to calculate the presumptive tax.

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