Taxing the Informal Economy: Challenges, Possibilities and Remaining Questions*

Abstract

The International Centre for Tax and Development is a global policy research network dealing with the political economy of taxation policies and practices in relation to the poorer parts of the world.Our operational objectives are to generate and disseminate relevant knowledge to policymakers and to mobilise knowledge in ways that will widen and deepen public debate about taxation issues within poorer countries. Our ultimate objective is to contribute to development in the poorer parts of the world and help make taxation policies more conducive to pro-poor economic growth and good governance. The ICTD's research strategy and organisational structures are designed to bring about productive interaction between established experts and new stakeholders. A catalogue record for this publication is available from the British Library. All rights reserved. Reproduction, copy, transmission, or translation of any part of this publication may be made only under the following conditions: -with the prior permission of the publisher; or -with a licence from the Copyright Licensing Agency Ltd., 90 Tottenham Court Road, London W1P 9HE, UK, or from another national licensing agency; or -under the terms set out below.This publication is copyright, but may be reproduced by any method without fee for teaching or nonprofit purposes, but not for resale. Formal permission is required for all such uses, but normally will be granted immediately. For copying in any other circumstances, or for reuse in other publications, or for translation or adaptation, prior written permission must be obtained from the publisher and a fee may be payable. SummaryRecent years have witnessed significantly increased attention to the challenge of taxing small businesses in the informal sector. However, much of this recent attention has remained focused on comparatively technical issues of revenue maximisation and policy design. This paper argues that this debate should focus increasingly on the wider development implications of informal sector taxation, as well as the political and institutional barriers to improved performance.When considering the merits of committing scarce resources to taxing small informal sector firms, debate has frequently focused on limited revenue potential, high costs of collection and potentially perverse impacts on small firms. By contrast, recent arguments have increasingly emphasised more indirect benefits of informal taxation in relation to economic growth, tax compliance and governance. These potentially broader benefits are increasingly finding support in recent research, but they are contingent on government support and consequently demand further attention.When we turn our attention away from whether tax authorities should tax small informal businesses towards the challenge of how to do so more effectively, we again argue that a broader frame of analysis is needed. Most existing research has focused on developing less distortionary tax regimes and on tax simplification in order to reduce the costs of compliance. However, w...

Rejuvenating Greece’s labour market to generate more and higher-quality jobs

“…High wedges discourage employers and employees from declaring work and incomes, especially when tax morale, confidence in public institutions and the effectiveness of government are weaker (Joshi, Prichard and Heady, 2014 [66]; Torgler and Schneider, 2007[67]). Estimates vary, and suggest that as much as 33% of total employment (25% excluding the agricultural sector), was informal in Greece in 2012, the highest of any European OECD country (International Labour Office, 2016 [68]), although the share may have fallen in recent years as the government pursues action plans to reduce informality.…”

On the benefits of formalization: Panel evidence from Vietnam

“…There are a number of possible channels through which formality can have a positive impact on firm outcome. These channels include, for example, access to credit, greater opportunities to engage with large firms and the government, or greater access to training and support programmes (Joshi et al 2012); opportunity to enlarge customer base and lower the costs of corruption (McKenzie and Sakho 2010); ability to lower the cost of contracting labour (Fajnzylber et al 2011). These channels can be used in designing policies intended to promote registration.…”

“…have a tax code), a common indicator of formality in the literature (Fajnzylber et al 2009;McKenzie and Sakho 2010;Rand and Torm 2012). Using the formal status variable (namely Status: 0 if a firm is informal, and 1 if formal), we 1 Formal sector benefits include increased access to credit, greater opportunities to engage with large firms and the government, or greater access to training and support programmes (Joshi et al 2012). A clear policy implication of the exclusion view is the removal of costly entry regulations, but evidence suggests that ease of formalization alone will not induce most informal firms to become formal (Bruhn and McKenzie 2014).…”

“…Relative to transmission channels, formalization is assumed to benefit the firms through increased access to credit, greater opportunities to engage with large firms and the government, or greater access to training and support programmes (Joshi et al 2012); but the existing evidence is weak. McKenzie and Sakho (2010) find that higher profits due to registration appear to come mainly from increases in their customer base; and there was no impact of formalization on the prospect of obtaining a bank loan.…”

Governance quality and tax morale and compliance in Zimbabwe’s informal sector

“…Taxpayers' perception of government and how it uses tax revenues ultimately shapes their political willingness to organise for tax and tax compliance purposes and also how the state mobilises revenues from their citizens has a bearing on the quality of governance. On the other hand Joshi et al (2013Joshi et al ( , 2014 avow that taxation of the IS was an avenue to allow for political bargaining between the state and IS taxpayers thereby legitimising taxation and the role of government (governance gains of IS taxation). If government is viewed as legitimate and credible, tax morale escalates thereby enhancing government's propensity to levy and collect taxes (Everest-Phillips, 2010;Everest-Phillips & Sandall, 2009).…”