Are Presumptive Taxes a Good Option for Taxing Self-employed Professionals in Low and Middle-Income Countries?

Abstract

The term ‘hard-to-tax’ (HTT), in tax evasion literature, refers to farmers, small and medium-sized enterprises (SMEs), and professionals. However, research on the hard-to-tax in low and middle-income countries (LMICs) has primarily focussed on farmers and SMEs. Professionals are rarely critically considered, despite the acknowledgement in the literature that, considering their potential earnings, the absolute financial amount involved in evasion among professionals in LMICs is probably higher than among farmers and SMEs. Further, while presumptive tax regimes have been widely used in LMICs to tax SMEs and farmers, professional income is almost always explicitly excluded in the eligibility criteria for these regimes. There is also a gap in the literature on presumptive taxes. Scholarly discourse on these regimes have primarily focussed on their suitability for farmers and SMEs; there is little discourse on their suitability for professional income. The author fills these two gaps by making use of qualitative data on tax evasion by lawyers and dentists in Kenya. The qualitative data suggests that professionals fail to comply because of (i) peer influence, (ii) low levels of financial and tax capability, and (iii) the damaged political legitimacy of the tax authority. This paper makes an original contribution to the literature on the hard-to-tax and presumptive taxation by proposing that although presumptive tax regimes ordinarily explicitly exclude professional income, these regimes can be useful partial solutions for taxing newly qualified, self-employed professionals if they are well-thought-out, meticulously designed and implemented, and rigorously monitored.

Keywords: Hard-to-Tax, Presumptive Tax, Tax Evasion, Taxing Professionals, Developing Countries, Taxation in Kenya.