Taxing the Informal Economy is not a Silver Bullet for Financing Development - or the COVID-19 Recovery

Taxing the informal economy neither guarantees substantial new revenue nor a fairer tax system. Instead, it risks increasing the burden on some of the most vulnerable groups. In the middle of an economic crisis, this would serve to reinforce deeply embedded societal inequalities. Building new fiscal relationships with individuals and businesses not previously registered with the tax authority may nevertheless be a desirable policy under some conditions – namely, when policies to tax the informal economy are better specified and targeted. Rather than broadly targeting the informal economy, or focusing attention on small-scale, low-revenue activities, policies should focus on identifying (a) large-scale economic transactions made in cash, (b) fake transactions in business accounts, and (c) higher-income individuals that currently escape the tax net, including professionals such as lawyers and dentists. Meanwhile, closer state interaction with smaller enterprises and informal production clusters may be particularly constructive and valuable in the aftermath of the Covid-19 pandemic – but this interaction should be seen in a developmental context, with a focus on investing, addressing vulnerabilities and building relationships with citizens, rather than solely extracting revenue from them.