Why the Informal Sector Is Not a Tax Goldmine

<p dir="ltr">The promise of untapped revenue is a much-repeated argument for more aggressive and broader taxation of informal economies. Referencing the large size of informal sectors and uncaptured income, as well as limited revenues generated from informal sector specific tax handles, the argument suggests that informality represents a ‘goldmine’ of untaxed revenue. This policy brief reviews why the ‘goldmine argument’ is false. While it may sound intuitively correct, it is based on a common misunderstanding of the underlying statistics, tax handles, and income distributions within informal sectors. Doubling down on current approaches to taxing informal economies is in fact unlikely to produce substantial revenue gains, while raising collection costs and equity concerns – largely because current approaches are not targeted at capturing higher-income operators in informal sectors. Consequently, a more productive approach for revenue authorities to engage with informal sectors should rest on four pillars: targeting, development, data and dialogue. </p>