Essay On Informal Economy

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Documented/Formal and Undocumented/Informal Economy:
The question of taxation of the informal/grey economy in context of developing & transition countries has been in the spot light in recent years. According to OECD’s book titled ‘is informal normal’ informal economy forms 60% of world’s total economy and in south and south east Asia, informal economy accounts for up to 70% of economic activity in sector like agriculture.
The formal or documented economy comprises of the industries, firms and economic activities that are taxed, monitored and regulated by the government, while the undocumented or informal sector entails employment and firms that are not regulated and taxed by government. The term of informal economy or sector was coined in 1973 by British anthropologist Keith Hart in his study on Ghana.
In recent years taxation of
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Increased taxes from a broader tax base is important revenue source to fund the infrastructure that is a utility available to all citizens. Increased tax revenue can be vital in supporting and enhancing national defense and security expenditures, constructing road networks, social services, health and education. Without revenue from taxation these services cannot exist. iii. Documentation of informal sector reduces the economy’s resistance to policy-induced reforms. iv. Documentation or formalization of informal economy reduces the risk of large and widespread illegal activities that remain hidden from the view of tax and regulatory authorities.
v. Informal sector battles all government efforts to avoid taxation and if government initiative is not successful it will result in continued low tax-to-GDP ratio and necessitating government’s reliance on foreign assistance and funding to plug the fiscal shortfall. vi. Documenting or formalization of informal sector will help improve the economic efficiency and productivity because undocumented economy is inherently uncompetitive and locks the economy behind a low productivity

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