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Managing Ethiopian Cities II: Informality in Ethiopia: Taxing the Hard to Tax
Large informal (hard to tax) sectors are an integral part of the economies of
developing countries (Ethiopia included). In much of Africa, the informal, or gray
economy that escapes tax collectors and government regulators, is the hidden
dynamic driving economic growth. The informal economy is an important
contributor to employment and production in Ethiopia but also to fiscal and
regulatory evasion and, as such, is an intensely debated issue. Informality has a
direct impact on public revenues and expenditure. If it is large and growing over
time, policy must attempt to bring it more fully into the tax-base and/or attempt
to contain its growth. Possible policy-measures will depend on the causes of its
growth. If it is growing because of restrictions on entry into formal activity, then
policy must address these restrictions. If, on the other hand, it is growing because
of too many taxes, then policy must address the structure of taxation. Addressing
these causes may transform informal into formal activity. Important questions to
answer in terms of policy are: to what extent the informal sector should be
taxed, and what instruments can be used to efficiently and effectively
accomplish the task.
All over the world several governments (including Ethiopia) have relied in the
recent past, and still even rely today, on various forms of presumptive taxation,
to respond to the high levels of informality. Existing presumptive tax regimes
have seldom been examined thoroughly. This paper looks at the issue of
presumptive taxation in the Ethiopian context and reflects on how efficient and
effective the use of presumptive taxation has been. This paper argues that it is
difficult to evaluate the success of special tax regimes (presumptive taxation in
this case) to achieve their goals, whether those goals are increased participation
in the formal tax system, obtaining some basic level of revenue from all economic
agents, educating new taxpayers, or reducing compliance costs for at-risk
taxpayers