Taxation in the context of high informality: Conceptual challenges and evidence from Sub-Saharan Africa

Abstract

The terms ‘informal sector’ and ‘shadow economy’ are in vogue but remain conceptually fuzzy in what they measure or mean. They are used in tax research and policy but with many assumptions, leading to poorly designed policies that lead to further immiseration of those who derive their livelihoods informally. Focusing on Sub-Saharan Africa, I critically interrogate the current conceptualisation of informal economic activities and how they are thought to relate to taxation. Critically, I use existing estimates of informality and taxation data to demonstrate the need to cast the tax net wider than the usual bias toward visible subsistence informality. I show that informality is not novel among many factors negatively associated with tax revenue mobilisation, especially in its broader historical context. I then show that technology adoption can play a role in mitigating taxation challenges associated with informality. However, the role of technology remains limited if not embedded in and supported by improving government institutions, which, though protracted, show higher outcomes on taxation. Since the terms ‘informal sector’ and ‘shadow economy’ describe diverse economic activities, conceptual diversity is not necessarily problematic, but precision is necessary when these terms are brought to tax research, including frank discussions on data quality issues and when the concepts need to be generalised or restricted to context.