There are many reasons to be anxious about the taxation of informal sectors in lower income countries. Classic policy interventions in this area, including mass registration exercises and presumptive taxes, have yielded limited revenue, and often had negative equity implications, with concerningly high burdens in particular for low-income workers. There is often a lack of trust among many of the actors involved, as well as a lack of consensus about what informality is, complicating discussions around best practices. As backdrop to this, revenue pressures continue to fuel wider political and popular narratives about the potential revenue to be captured through formalisation or taxation of the sector.
With these challenges in mind, the ICTD, in collaboration with Women in Informal Employment: Globalizing and Organizing (WIEGO) and the African Tax Administration Forum (ATAF), and with the support of the Ghana Revenue Authority, hosted a three-day closed workshop in Akosombo, Ghana to discuss the taxation of informal economies. The event brought together 80 participants from over 25 countries, including 16 Revenue Authorities, Ministries of Finance, civil society organisations, activists and academics. Sessions covered key areas of policy and administrative focus, including registration and presumptive tax regimes, while also focusing on the distributional and equity dynamics of informal sector taxation, how policymakers may better work with informal workers, and the politics of implementation.
Reflecting on the workshop, and on the frank and open discussions about both policy challenges and practical ways forward, we are reminded of the many challenges in this field but also find ourselves surprisingly optimistic about the road ahead. In particular, we find three reasons for optimism:
A Growing Consensus on the need for a new way forward
One of the most striking features of the conversations and inputs from policymakers, academics and civil society actors alike was an increasing agreement on the nature of the challenge in the relationship between taxation and informal sectors. There is a recognition that “how do we start taxing the informal sector” is largely the wrong question as many informal workers are already paying taxes both at the national and subnational levels. However, while these payments add up to substantial burdens for lower income informal enterprises operating under the poverty line, common strategies to tax the informal sector often insufficiently target higher income operators. This means that common policies still underperform from a revenue perspective, while imposing negative equity impacts.
A general agreement about the need for reforms to better target higher income earners
Consequently, there was a growing consensus that these strategies don’t do a good enough job at protecting the lowest income earners and targeting those with higher incomes. In the words of one of the workshop participants, the challenge is “to not tax the tomato sellers”, but instead institute policies that recognise the heterogeneous and highly unequal nature of informal sectors and can direct revenue authority resources towards capturing high income operators. Fruitful discussion about the types of data needed to better identify and capture higher incomes, even in low-capacity contexts, may provide a useful basis for administrative policy testing and evaluation in the coming years.
Appetite for research and for policy to be shaped by empirical evidence
Finally, we were heartened to see a real appetite for empirical evidence. While recent research has done much to shape this conversation and pose new questions, there was agreement across countries and stakeholders that more research and evaluation is needed around specific policy areas (e.g., methods of targeting higher income earners in the informal sector, risk-based registration approaches, intragovernmental data sharing needs). With stakeholders rethinking their approaches in this area, there is a real desire for inter-institutional collaboration and learning exchange among revenue authorities and policymakers. Crucially, there was also an agreement that this will require better collaboration with informal workers and informal worker associations, both in understanding the effects of current systems and productive ways forward.
The Work Ahead: Politics still reign
Despite these reasons for optimism, substantial challenges remain ahead. While recognition of what the challenges are is increasing, alongside the importance of new approaches that are evidence-based and developed together with informal workers, important questions are yet to be answered.
At the same time, the political context is difficult. Many participants highlighted the ways in which revenue pressure and targets, political resistance to taxing higher income earners, and challenges to inter-institutional cooperation and data sharing are complicating work in this area. The recent cuts to aid spending as well as further revenue pressures will make false narratives about ‘goldmines’ in the informal economy even more attractive, and risk leading policymakers to double down on failing approaches.
In this context, it is not only important to note positive developments in the narrative around taxing informal sectors, but also to protect and develop the type of inclusive, practical, and evidence-based conversations that were started at this workshop. To this end, the ICTD will soon be launching a community of practice around taxation and informality with the aim of continuing to provide forums for engagement, learning, and peer-to-peer exchange and to help foster new partnerships, collaborations, and research projects that may provide further reasons for optimism in the coming years.
Want to learn more?
- Sign up for the tax and informality community of practice here
- Read about the workshop here
- Explore some recent outputs on informality and tax by the ICTD and partners here:
Policy approaches and recommendations
- ATAF-ICTD Policy Paper: Taxing Informal Economies: Practices, Challenges & Ways Forward
- T20 policy brief: Taxing Informal Workers Fairly to Reduce Inequality and Support Inclusion
Equity impacts
Estimation issues around revenue potential
- Measurement and Mirage: The Informal Sector Revisited
- Formalization and its Discontents: Conceptual Fallacies and Ways Forward
Simplified taxation
- Simplified Taxation in Africa: What We Know – and Need to Know
- Trade-offs in the Design of Simplified Tax Regimes
- Presumptive Tax on Small and Microenterprises with a Gender Lens in Ethiopia
Registration
- Catch Them If You Can: the Politics and Practice of a Taxpayer Registration Exercise
- Why Mass Tax Registration Campaigns Do Not Work
