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A Qualitative Evaluation of Income Tax Designs for the Informal Economies in Pakistan and Thailand

This paper is concerned with the use of appropriate presumptive income tax (PIT) designs for small businesses in large informal economies. As informal economies hamper income tax implementation by adversely affecting compliance behaviour, developing countries mostly rely on PIT. Despite the widespread use of PIT, little research has been undertaken to assess the effectiveness of different types of PIT design in large informal economies. This paper analyses the PIT designs for small business in Pakistan and Thailand for their ability to tackle the informal sector. The regimes are primarily tested against their adherence to the principles of a good tax system. The findings suggest that both regimes, being turnover-based PIT designs, are difficult to enforce. In terms of efficiency and equity, the Thai PIT design is relatively better than the Pakistani PIT design for taxing the informal sector. These findings can help other developing countries to improve their PIT designs to tax the informal economy.