Across Africa, discussions on taxing the informal economy often begin with the familiar assumption that informal businesses remain outside the tax system because they are unregistered, invisible, or non-compliant. In response, tax reforms have largely focused on formalisation through taxpayer registration campaigns, simplified tax regimes, and digital systems aimed at integrating small businesses into national tax administrations.
Yet, informality remains highly resilient. According to the International Labour Organization (ILO), more than 60% of the world’s employed population – around 2 billion people – work in the informal economy. Africa records some of the highest levels globally, with informal employment accounting for about 85.8% of total employment and 89.2% in Sub-Saharan Africa.
National data tells a similar story. In Kenya, the informal economy accounted for 83% of total employment in 2019. In Uganda, the proportion has remained around 90% in recent years. Similarly, in Benin and Togo, informal activities continue to dominate labour markets.
These figures show that informality is not a marginal issue. It is a defining feature of African labour markets and an important part of how people earn, trade, and survive. This persistence raises a difficult but necessary question. If formalisation has been pursued so consistently, why does informality remain so dominant?
The answer may not lie only with taxpayers but with the design of tax systems themselves.
Formalisation is important but insufficient on its own
Formalisation can improve taxpayer visibility, expand administrative data, and create pathways for businesses to access services, legal identity, and credit. However, research on taxing the informal economy shows that the debate is more complex than registration alone. It raises concerns around limited revenue potential, high collection costs, possible adverse effects on small firms, and broader governance implications associated with taxing informal actors.
Many reforms have succeeded in making informal businesses more visible. Taxpayer registers have expanded, digital systems have improved administrative reach, and simplified regimes have reduced some compliance barriers.
However, visibility does not automatically translate into sustained compliance. A business may be registered but remain inactive. It may possess a taxpayer identification number but still struggle to file, pay, or comply consistently.
This suggests that the core problem is not only whether informal actors are known to the state, but whether the system they enter is suitable for their economic realities.
Majority of tax systems are designed for formal businesses
Most tax systems are built around assumptions drawn from formal economic activity: fixed business locations, stable income streams, proper record-keeping, legal identity, and predictable transactions.
In contrast, informal economies often function differently. Activities may be mobile, seasonal, low-margin, cash-based, and closely linked to household survival strategies.
When informal actors are brought into systems designed mainly for formal businesses, compliance may become difficult not because they are unwilling to contribute, but because the system itself does not match how they operate.
Should tax systems adapt to the realities of informality?
This is not an argument against formalisation. Legal identity, taxpayer registration, and business recognition remain important. However, formalisation should not simply mean adding another layer of obligations on top of existing local fees and charges. Indeed, contrary to popular belief, informal actors do pay taxes in one form or another. If informal actors are already paying something, somewhere, reform should begin by understanding those existing interactions.
A stronger approach may require shifting attention from formalisation alone toward functional inclusion through better coordination. Informal businesses often interact with several public institutions at once: local governments may collect daily fees, market levies, or municipal cleaning fees, while national tax authorities focus on presumptive taxes, income tax or Value Added Taxes. Each institution may be acting within its legal mandate, but from the taxpayer’s perspective the system can feel fragmented, repetitive, and costly.
The real challenge is to make institutions work together in a way that is coherent, predictable, and fair. Better coordination between local governments and national tax authorities could help reduce duplication, recognise existing local contributions, simplify registration and payment processes, improve data sharing, and create clearer compliance pathways for small businesses. Digital tools can support this transition, but only where they simplify the taxpayer experience rather than add another layer of compliance.
The informal economy is a mirror of tax systems that need to become more coherent
Informality is not simply a compliance gap waiting to be closed. It is also a signal. It reflects how people earn, trade, move, and survive in economies where public institutions often interact with them separately rather than within a coherent national fiscal framework.
The future of taxing the informal economy should therefore not rely only on asking informal businesses to become formal. It should also ask whether tax systems are ready to adapt.
The real task is to build systems that are simpler, better coordinated, and more realistic; systems that recognise existing contributions, reduce duplication, and make compliance beneficial rather than burdensome.
