Associational taxation: a pathway into the informal sector?

Abstract

The informal sector is large in most developing countries. It typically comprises most of the labour force. Equally typically, governments obtain little tax revenue from this sector and even less direct tax revenue. Those are statements of the obvious: exclusion from the tax net is a defining characteristic of informality. Is this a problem? Should governments be putting more emphasis on expanding their tax take from the informal sector? There is no consensus on the answer to those questions. Most professional tax specialists tend to be skeptical on pragmatic grounds. Why chase after a sector where the direct costs of collection will be high in relation to the revenue raised, and where the costs of compliance might weigh heavily on the taxpayers themselves? These and other important questions are what this article seeks to explain