Working papers etc.

The assumption that the informal sectors in low-income countries are lucrative tax bases is mistaken

For the majority in subsistence informality, it is more appropriate to prioritize securing livelihoods than tax surveillance

The Covid-19 pandemic created challenges regarding public revenue around the world. Governments across the globe undertook huge expenses to finance medical responses and social protection programmes. At the same time, tax collection decreased due to decreased economic activity. These challenges have raised the risk of unsustainable public debt – especially for many low- and middle-income countries. One way of addressing this has been a focus on taxing the informal economy especially in poorer countries in which many people work informally. In a new working paper, Abel Gwaindepi problematizes the notion that informality is impeding tax revenue collection and that informal sectors are lucrative tax bases. Those are the two main problematic assumptions among researchers and development practitioners when it comes to taxation and informality.

The problem lies in how researchers and policymakers bring informality to domestic revenue mobilization research and policy debates. The visible informality, marked by street vendors in transport hubs, and in informal markets, is taken to constitute informality in its entirety. The policy assumption becomes that if these are registered, more taxes will be realized, but this misses the bigger part of informality that has consequential tax ramifications. The working paper takes an approach that conceptually broadens informality beyond the narrow focus on visible informality. This is because informal activities in many low-income countries are intertwined with formal activities.

In the working paper Abel Gwaindepi analyses the latest UNU-WIDER’s Government Revenue Dataset (GRD) and some recent estimates of the sizes of the shadow economies for Sub Saharan African countries. He concludes that, for adequate revenue mobilisation, we need to broaden the narrow focus on visible informality. High levels of informality implies that informal economic activities happen in both the formal and informal spheres. The study also shows that improving the quality of government institutions and using technology yields only limited results because informality is deeply structural. Abel Gwaindepi argues for a re-articulation of informality when it is included in revenue mobilization research, including frank discussions on perennial measurement and data quality issues inherent in data relating to informal activities.

Reforms to register all informal firms and workers may be beneficial for a few reasons, but taxation cannot and should not be the leading driver of policy because informality that affects revenue collection is much more pervasive and fluid with no formal/informal boundaries. For the majority in the visible informality, mostly those in subsistence informality, it is more appropriate to prioritize securing livelihoods than tax surveillance. The pandemic has exposed the extent of economic and social precarity in highly informal economies. Misconceived taxation policies may worsen the plight of informal workers.

DIIS Experts

Abel Gwaindepi
Sustainable development and governance
Senior Researcher
+45 9132 5408
Domestic revenue mobilization and informality
Challenges and opportunities for sub-Saharan Africa