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Informal Economy in SSA: Characteristics, size and tax potential

Makochekanwa, Albert (2020): Informal Economy in SSA: Characteristics, size and tax potential.

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Abstract

The study analyzed informal economy (IE) in SSA. The research provided insights into various possible definitions of IE, elaborated on the major causes and characteristics of this sector in Africa. The size of informal economy activities in terms of contribution to GDP and employment was also analyzed. Tax and revenue potential from the informal economy activities was also investigated. With regards to size, the informal economy in Africa in terms of its contribution to GDP has declined from an average of 42% of total GDP in 1991 to 35% of total GDP by end of 2015. At country level, the study found that Zimbabwe was the country with highest level of informality with informal economy contributing on average 61% towards the country’s GDP. Informal economy activities for Zimbabwe have actually grown from contribution 57% towards annual GDP in 1991 to 67% of GDP in 2015. On the other extreme, Mauritius was the country with least informal economy activities which averaged 23% towards national GDP. Informal economy activities for Mauritius actually decreased from contributing 26% towards the country’s GDP in 1991 to 19% of its GDP in 2015. The contribution of informal economy work towards employment in Africa was found to be around 80% in terms of non-agricultural jobs, over 60% of urban employment and over 90% of new jobs. Going into the future and after taking on board cost and benefit analysis, the paper analyzed three possible strategies that can be employed in taxing activities in the informal economy in Africa. These three options are (i) taxing indirectly through trade taxes, (ii) expanding the reach of major formal sector taxes, and (iii) developing specialized presumptive tax regimes.

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