Taxing the Informal Economy is not a Silver Bullet for Financing Development – or the Covid-19 Recovery
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Summary Brief 24
This briefing explores the Covid-19 pandemic, which has raised twin challenges for public revenue around the world. Governments have undertaken huge expenses to finance medical responses and social protection programmes.
At the same time, tax collection is decreasing as a consequence of both pandemic-related tax breaks and a dip in economic activity and trade. These challenges raise the risk of unsustainable public debt – especially for many low- and middle-income countries. As a consequence, policymakers are seeking new sources of revenue to bolster state budgets.
In this context ‘taxing the informal economy’, or ‘broadening the tax net’, have become popular talking points. This brief explores why attempts to tax the informal economy typically result in only limited revenue, with the cost of collection often being higher than revenue raised.
Max Gallien is a Research Fellow at the ICTD. His research specialises in the politics of informal and illegal economies, the political economy of the Middle East and North Africa and development politics. He completed his PhD at the London School of Economics. Max co-leads the informality and taxation programme with Vanessa, as well as the ICTD’s capacity building programme.
Vanessa van den Boogaard is a Research Fellow at the ICTD and a Senior Research Associate at the Munk School of Global Affairs and Public Policy at the University of Toronto. She completed her PhD thesis on informal revenue generation and statebuilding in Sierra Leone, and has ongoing research on the topic in the Democratic Republic of the Congo and Somalia. Vanessa leads the ICTD’s new programme on civil society engagement in tax reform and co-leads the research programme on informal taxation.
Mick Moore is a Professorial Fellow at the Institute of Development Studies and the founding CEO of the International Centre for Tax and Development. He is a political economist whose broad research interests are in the domestic and international dimensions of good and bad governance in poor countries, focusing specifically on taxation in Asia and Africa.
