The International Centre for Tax and Development has an interesting new article out which assesses the idea of promoting formalization of small firms in low income countries. As they note,
- First, there is no simple distinction between formal firms and informal firms: there are many degrees of ‘formalisation’, with many firms registered in some areas, but not others, and paying some taxes and fees, but not others.
- Second, formalisation policies, including registering new taxpayers, are often drawn up without adequate appreciation of the practical challenges of taxing informal businesses and actually raising new revenue from registered taxpayers.
- Third, the term ‘informal sector’ lumps together a hugely diverse set of businesses, ranging from large tax-evading firms to small and micro businesses. Relatively large, but informal and cash-based firms present a major problem of tax evasion. By contrast, expanded taxation of smaller firms offers limited revenue potential, while requiring distinctive strategies more attuned to questions about equity, inclusion, and administrative realities.
- Finally, simply widening the tax net is insufficient to strengthen tax–accountability linkages or taxpayer engagement. More nuanced strategies are likely needed.