How do small firms respond to turnover taxes?
This brief discusses how, contrary to standard economic predictions, small firms in Zambia did not adjust their turnover to avoid higher tax brackets after reforms to the turnover tax system. Instead, they often negotiated tax payments directly with collectors, raising questions about how to design more transparent and equitable tax systems.
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Overbeck-Lungu-Policy-Brief-June-2025.pdf
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- In Zambia, small firms are subject to a turnover tax. Between 2017-2018, the Zambia Revenue Authority introduced tax brackets based on small firms' total turnover to make the turnover tax for small firms more equitable.
- A common outcome of rising tax brackets is that firms will try to stay just under the threshold of the higher tax rate; however, this did not happen in Zambia, meaning that firms are consequently paying more tax than a traditional economic model would predict.
- Firms did not try to stay just under the tax bracket threshold, as they sometimes bargained with tax collectors to determine how much tax they would need to pay.
- The study leads to the question, "How can we make taxes more transparent and equitable in their design?"
- For revenue authorities, an answer might be to place more emphasis on expanding third-party reporting and VAT.