Taxing the Informal Economy: The Current State of Knowledge and Agendas for Future Research

This paper reviews the literature on taxation of the informal economy, taking stock of key debates and drawing attention to recent innovations. Conventionally, the debate on whether to tax has frequently focused on the limited revenue potential, high cost of collection, and potentially adverse impact on small firms. Recent arguments have increasingly emphasised the more indirect benefits of informal taxation in relation to economic growth, broader tax compliance, and governance. More research is needed, we argue, into the relevant costs and benefits for all, including quasi-voluntary compliance, political and administrative incentives for reform, and citizen-state bargaining over taxation

The Political Economy of Tax Reform in Bangladesh: Political Settlements, Informal Institutions and the Negotiation of Reform

political economy, tax reform, political settlementsThis paper explores the political economy of tax reform in Bangladesh over several decades, shedding light on the complex factors that account for unusually effective and sustained resistance to significant reform. We contend that it is necessary to understand both deep-seated formal and informal institutions and the micro-level incentives that shape the negotiation of short-term reform in order to comprehend tax outcomes. We describe a tax system that is highly informal, largely manual and characterised by high levels of discretion and corruption. However, despite appearing highly dysfunctional on the surface, this system serves the core interests of powerful political, economic and administrative actors. Underpinned by robust informal institutions, the current system delivers low and predictable tax rates to businesses, provides extensive discretion and opportunities for corruption to the tax administration, and acts as an important vehicle for political elites to raise funds and distribute patronage and economic rents. While the tax system has not been without reform, individual reform efforts have been constrained by the parameters of this broader settlement, leaving competing interest groups to pursue strategic gains at the margins while seeking to satisfy external reform demands. This tax bargain reflects Bangladesh’s broader political economy, which is characterised by entrenched informal institutions underpinning the combination of generally weak governance and high levels of economic growth – the so-called ‘paradox of Bangladesh’.DfID, NORA

The Costs of VAT: A Review of the Literature

This paper reviews the published literature on the definition and measurement of the administrative and compliance costs of taxation, with special reference to VAT (including evasion and fraud) in the European Union