Taxing Informal Workers Fairly to Reduce Inequality and Support Inclusion

Given that almost two-thirds of the world’s working population work in the informal economy, reforming fiscal policies to tax them more fairly is perhaps the single most impactful way to reduce inequalities and improve the livelihoods of the working poor.

Rethinking policy approaches to the taxation of the informal economy in both G20 and lower-income partner countries can be a central pillar of the G20 agenda on reforming fiscal policies to reduce inequalities and eradicate poverty.

The main challenges in this area include:

1. Regressive and unfair tax regimes in countries with high levels of informal employment;
2. A large social protection finance gap in countries with large informal economies; and
3. High levels of poverty and income inequality.

The G20 can play a crucial role in raising awareness of and supporting fiscal policies that decrease inequality and support inclusion and social cohesion. The G20 can support fairer taxation of the informal sector by taking the following actions:

1. Support fairer taxation of the informal sector within member countries and in countries with high informal employment;
2. Extend social protection to informal workers and close the social protection finance gap without increasing taxes for low-income informal workers;
3. Promote progressive taxation beyond the informal economy to reduce income inequalities, poverty, and
4. Facilitate knowledge generation, information sharing and South-South exchanges between revenue authorities.