In several Western countries, as well as in virtually all developing and transition
ones, the government’s ability to redistribute income in favour of the less well-off is severely
limited by the fact that certain groups of citizens can escape their tax obligations more
easily than others. In this paper, we focus our attention on one of the possible responses to
that problem, namely the recourse to presumptive taxation, whereby not income as such, but
a proxy for income, is selected as the tax base. To study this issue, we employ an occupational
choice model where an individual can either be a worker or an entrepreneur. We assume
that a conventional income tax is in place and that only entrepreneurs, who are at the top of
the income distribution, can partially avoid the income tax. In this setting, we show that presumptive
taxation based either on occupational choice or on the firms’ input costs can raise
the welfare of the workers, who are the poorest members of the society. This outcome is not
necessarily achieved, however, by taxing entrepreneurs: in a number of circumstances, presumptive
subsidies for the entrepreneurs are preferable to presumptive taxes, the reason being
that the latter may cause production inefficiency as well as increase tax avoidance costs