ABSTRACT
The relationship between the informal economy and the tax system is an important, but under-researched, policy issue. While tax reforms often attempt to bring the informal economy within the tax system, there are important areas which have not received as much attention. Drawing on the South African experience, the chapter argues that there are a number of important conceptual, methodological and practical issues that should be considered. The first is how to conceptualise and measure the informal economy from an economic policy perspective. Second, who falls inside the tax net and who does not, and what the implications are, both for our understanding of informality, and for creating effective tax policy. Third, the implications for competitiveness of businesses in the informal sector who are not registered for VAT, increasingly the most important form of taxation in developing countries. Finally, the impact of the attempt by some states, through the imposition of a presumptive tax, to draw those in the informal economy into the tax system, and the problems arising from this approach, are examined.
