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Informality taxation

Based on a publication by the Egyptian Center for Economic Research, findings on everything related to the taxation of informality policies in Egypt are to be discussed. Taxation of informality refers to the taxation of businesses from the informal sector, in other words, small and individual businesses which do not require government regulation. According to the paper, there are 3 main points that policy makers need to keep in mind while considering the taxation of the informal sector. The 3 key points are as follows: the additional revenue from informal taxation, equity gains, and minimizing economic distortions.

First, it is important to consider that various types of informality affect the economy differently and are differently affected by taxation. The government usually specifies a limit of or the “turnover threshold ”; enterprises that make money above that revenue are eligible for VAT and thus are not considered part of the informal sector. The informal sector, on the other hand, has multiple types of businesses. It is because of that firms are divided into 4 categories based on the level of informality: micro, small, medium, and large.

Micro businesses refer to individual businesses and are mainly service based. An example would be a freelance writer, a plumber, or a maid. Such businesses can easily hide their income and evade taxes. Small businesses are firms with a very small number of employees; as a result, tax evasion and income hiding would be a little more difficult in this case because employees and business owners do not always have mutual interests.

Medium sized-firms operate similar to large firms so tax-evasion would be a complicated process but would be easier to track by the government. Therefore, when discussing taxation of informality it is usually micro and small businesses that policy makers should consider because medium sized firms are easier to regulate. Despite no significant amount of revenue can be earned taxing micro and small businesses, governments tend to tax these businesses in an effort to ensure fairness. There are also several arguments in favor of such taxes but the strongest one applies to developing countries, and that argument is that the informal sector in developing countries makes a massive portion of the economy compared to developed countries. Therefore in a country like Egypt, small business taxation should be brought forward. The question remains, however, what would be a simple and beneficial way that governments can enforce such tax of informality?

One of the main points is choosing an optimum threshold for small business revenue not too low that tax regulation efforts would cost more and not high that tax evasion efforts become cheaper for small businesses. However, economic studies have shown that getting the right range can yield considerable amounts of revenues and a healthy social system. To simplify calculating the optimal threshold, the calculation is made based on the small business turnover instead of the net income. Then a simple formula is used to derive the optimal tax based on the turnover, marginal value of public funds, and the cost per firm of taxpayer compliance and tax administration.

Informality taxation is indeed a complex process but is encouraged globally to ensurefair social structure and to increase government revenue. If implemented carefully and fairly, the government





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