Taxing the urban unrecorded economy in sub-Saharan Africa

Abstract

The global public revenue level of numerous African countries is low and the tax burden is highly concentrated on modern sector firms. One of the most current explanations for the low level of public revenue is the under-taxation of the urban unrecorded activities. The aim of this paper is to define an appropriate strategy in order to collect additional public resources from unrecorded activities in Sub-Saharan African Countries. In order to define an adapted taxation strategy for the unrecorded sector, informal micro-activities are distinguished from tax evasion activities (TEA). In Africa, the expansion of informal micro-activities is not fundamentally determined by their ability to evade taxes. On the contrary, the expansion of TEA, which are composed of large and small scale firms, is strongly linked to tax fraud (internal taxes, customs duties, etc.). The fundamental justifications of taxing the unrecorded activities differ according to the components of the unrecorded sector. Tax enforcement for TEA should produce substantial additional tax revenues and safeguards the durability of the tax collection system. With regard to informal micro-activities, taxation could be a significant tax revenue objective for local governments only and not for the central government. We examine the results of the measures aimed at taxing the unrecorded sector in some sub-Saharan African countries (Benin, Burkina Faso). Then, specific strategies are proposed in order to tax the informal micro-activities and TEA respectively. These strategies imply some specific tax measures widely implemented in Sub-Saharan African countries, such as a withholding tax profit. Some new measures, in particular a drastically simplified business tax for informal micro-activities, could be useful. With respect to tax collection, some innovative choices are suggested.