The overlapping global debt crisis and collapse in aid spending have put additional pressure on domestic resource mobilization in lower-income countries. Alongside measures like digitalization and the rationalization of tax exemptions, international and domestic policymakers have often highlighted the need to broaden the tax net in lower-income countries, particularly within the informal sector, as a way to meet revenue needs.
Increasing evidence, however, suggests that the revenue potential of taxing the informal sector—particularly among the poor—is significantly overstated. This is in part because revenue projections are based on flawed estimates, common policy mechanisms are not well-targeted at high-income earners in the informal sector, and projections don’t take into account the range of taxes that informal enterprises already pay.
This article is part of the Brookings Center for Sustainable Development compendium “Innovations in public finance: A new fiscal paradigm for gender equality, climate adaptation, and care“.
