Raising Revenue to Cover the Informal Sector
Different strategies for raising revenue to cover the informal sector
Panelists representing Ghana, Mali, Indonesia, Rwanda and the World Bank discussed the challenges of raising revenues for covering the informal sector at the JLN workshop session in Mombasa on June 7, 2011. Debated were the relative merits of different strategies for raising revenues such as general taxes, payroll taxes, special earmarked taxes, donor and community contributions.
During the June 7, 2011, JLN workshop session on raising revenue to cover the informal sector it emerged that most countries, in fact, utilize a mix of financing sources, although one source may be more dominant than the others. The financing source may also differ according to the population group(s) being targeted – thus payroll taxes tend to predominate when it concerns the formal sector, while a mix of sources is more relevant to cover the informal sector due to the many complexities of raising sufficient premium income from that sector and the large numbers who may not be able to pay premiums for themselves. In these cases, the African experience shows a trend towards additional special earmarked taxes, such as dedicated VAT, mobile phone taxes, and foreign exchange levies, mainly because these are seen by decision makers as politically more feasible than extending the general tax revenue.
The lessons that stand out from the discussion are that there are different ways to raise revenues for covering the formal sector and that the particular mix of sources depends very much on context. Importantly too, political dynamics tend to be more determining of the specific choice than technical considerations about optimal revenue sources and similar factors.