to bunch below the standard business tax rate threshold. Yet, it is not easy to compare the effective tax rates between the presumptive tax and the standard business tax because in the presumptive tax system, business expenses, such as labor costs, materials, and depreciation of assets, cannot be deducted from the taxable income when it is assessed on turnover.<sup>16</sup> In the ESS data, profits could not reliably be estimated because there is fungibility between business expenses and household expenses, which makes the effective tax rates comparison between the two tax systems difficult. There are also compliance costs related to paying the standard business taxes because of the requirement for financial record-keeping and the possible need for hiring accountants to comply with taxes. The tax rate of 2.5% is also the percentage that the government could charge without losing tax revenue, which is discussed in more detail in Appendix 9.

Table 7 shows the estimated effective tax rates of this hypothetical system and Figure 3 disaggregates the results by turnover quartiles. There are three main findings from the analysis. First, the tax burden is lower for female than male businesses (row 1) because most female enterprises earn less than the 50,000 birr threshold. Second, the effective tax rates for all businesses (row 1) as well as for those conditional on positive tax payments (row 2 in Table 7) under the hypothetical presumptive tax are lower compared to the effective tax rates in the current system (rows 2 and 4 in Table 6, respectively). This is largely due to the exemption of low revenue firms, which reduces the overall effective tax rates. Third, the hypothetical presumptive tax is more progressive, as larger firms would face higher burdens than smaller firms (Figure 3) and larger firms would pay more taxes in the hypothetical system than under the existing system. The results are similar when a 2% tax on turnover is used, except that the effective tax rates are 2% for firms with positive tax liabilities (see Appendix 10).

**Table 7: Policy Simulation, Effective tax rates of a hypothetical presumptive tax (2.5% of turnover and exemption for businesses earning less than 50,000 birr), by sex of owner**

||**Peri**<br>**Male-owned**|**od 1**<br>**Female-owned**|**Pe**<br>**Male-owned**|**riod 2**<br>**Female-owned**|
|---|---|---|---|---|
|(1) Effective tax rate (all)|**0.6**|**0.2**|**0.9**|**0.3**|
|(2) Effective tax rate, given tax>0|2.5|2.5|2.5|2.5|
|_Number of enterprises_|_775_|_740_|_703_|_658_|

Source: Author’s calculations using ESS 2018/2019 and 2021/2022.

Notes: The presumptive taxes are calculated based on 2.5% of turnover and an exemption threshold for firms with a revenue of 50,000 birr or less. Significant differences at p _<_ 0.05 are shown in bold.

> 16 The business income tax system here refers to Category B taxpayers (unincorporated businesses earning between 500,000 and 1 million birr) and Category A taxpayers (incorporated businesses regardless of turnover or unincorporated businesses earning more than 1 million birr). Categories A and B taxpayers can deduct business expenses from the taxable income whereas Category C taxpayers in the presumptive tax system cannot.

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