Designing a tax system for micro and small businesses : guide for practitioners

Abstract

This toolkit provides a number of options for reforming the tax system to facilitate small business compliance. While it does include some tax administration reform options, the focus of the toolkit is on the tax policy side. The toolkit specifically discusses strategies and options to facilitate small business compliance with the tax system. It thus addresses one - although a particularly important - element of Micro and Small Enterprise (MSE) formalization. Providing sufficient incentives for formalization has much broader dimensions, of course. As research in African countries has shown, tax resistance is likely to continue (and increase) if service provision does not improve, necessitating costly and coercive methods of tax enforcement that may undermine the legitimacy of the government. Improvement in service delivery for the majority of citizens is therefore a necessary condition to improve tax compliance. The existence of positive benefits in the form of public services, security, etc., may therefore increase the probability that taxpayers will comply voluntarily, without direct coercion. These findings confirm the importance of combining tax policy and tax administration reforms with improvements in public expenditure management and service delivery.

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