Taxing the Informal Economy is not a Silver Bullet for Financing Development - or the COVID-19 Recovery

Abstract

This briefing explores the Covid-19 pandemic, which has raised twin challenges for public revenue around the world. Governments have undertaken huge expenses to finance medical responses and social protection programmes. At the same time, tax collection is decreasing as a consequence of both pandemic-related tax breaks and a dip in economic activity and trade. These challenges raise the risk of unsustainable public debt – especially for many low- and middle-income countries. As a consequence, policymakers are seeking new sources of revenue to bolster state budgets. In this context ‘taxing the informal economy’, or ‘broadening the tax net’, have become popular talking points. This brief explores why attempts to tax the informal economy typically result in only limited revenue, with the cost of collection often being higher than revenue raised