Unpacking formalization of firms in low income countries

A roadside basket vendor in Nairobi, 2018

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,

  1. 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.
  2. 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.
  3. 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.
  4. Finally, simply widening the tax net is insufficient to strengthen tax–accountability linkages or taxpayer engagement. More nuanced strategies are likely needed.