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Informal taxation and livelihoods: A neglected research agenda

Written by Paul Harvey on 27 June, 2013 : 15:13


Informal taxation plays an important role in people's everyday struggle to secure their livelihoods. We need to look at what people have to pay to get by if we really want to open up opportunities to create resilient livelihoods in conflict affected situations.

Paul Harvey, SLRC Director

When people think about projects aimed at supporting livelihoods, the focus tends to be on trying to increase people’s incomes or productive capacities. Aid agencies distribute seeds, provide loans to small businesses and try to stimulate value chains. Largely ignored in attempts to support livelihoods is the expenditure side of the equation – what people have to spend in order to keep their children in school, get treatment when they are sick, buy and sell produce, travel to and from towns, and establish and maintain businesses. One way we’re hoping to correct this imbalance is by starting some joint work with the International Centre for Tax and Development on the relationships between taxation and livelihoods in conflict-affected situations. There’s a newly published working paper and initial empirical research being planned for later in the year.

Is it true that poor people are untaxed?

It’s fair to say that the growing development literature on taxation has not paid much attention either to the informal sector or to places affected by fragility and conflict. And when the informal sector is discussed, it’s often only in terms of how revenue authorities might be better able to tax informal economic activity – to bring the informal sector into the fold and regulate it. There’s often an assumption either that those working in the informal sector should be paying tax but are not or that they should be tax exempt for reasons of social equity and thus don’t deserve greater attention from those focussed on tax issues. But is this true?

While many individuals and households might not be paying official and codified taxes registered by national governments and central tax authorities, it does not follow that their livelihoods are going ‘untaxed’. Often they are paying a large number of formal and informal payments in the form of taxes, fees, licenses and bribes in order to keep their children in school, get health care and trade and produce goods. If we are interested in the relationship between taxation and livelihoods, then we should be considering the full range of payments that people have to make to get by and get out of poverty. We propose, therefore, a broader concept of taxation – one which captures both its formal and informal dimensions, and which might be defined as follows: ‘all payments that are made as the result of the exercise of political power or armed force (as opposed to market exchange)’.

From the point of view of an individual or a household, whether payments are formal or informal, legal or illegal makes little difference in terms of their impact on livelihoods. At a basic level, any form of taxation has an immediate negative effect on a household’s economy. When people have to pay fees to run a market stall or taxes when they trade livestock, then this reduces household income. Taxes incurred at markets or payments demanded when crossing administrative boundaries can reduce the profitability of producing goods for market, engaging in petty trade or starting small businesses. Further still, requirements to provide in-kind labour contributions to ‘community’ initiatives (such as road repair) can reduce the time available to engage in other productive activities, earn income through casual labour or migrate for work.

Good evidence on these issues is hard to come by. But the limited research that does exist suggests this is far from a trivial matter. In a previous SLRC blog, Katherine Haver told us how, in eastern DRC, for every 20-litre bottle of palm oil produced and sold at market, the state takes 7 litres (as well as $0.12) while the military takes a further 7 litres (plus $0.25). And then there’s another $10 per year to access the trees, plus a tax on the machine to extract the oil. A recent series of protection surveys by Oxfam similarly finds that ‘in many areas [of eastern DRC], extortion and illegal taxation mean that impoverished communities are viewed as a major commodity of war’. A study from last year on the livestock trade in Darfur found that the formal taxation burden had almost doubled between 2002 and 2011, and that traders now have to pay for armed guards to accompany their herds and numerous checkpoint fees to ensure safe passage.

Why should we be interested in these issues?

To the extent that taxes enable governments to deliver services, ensure security and create a regulatory environment for business, taxes can have positive impacts on livelihoods. Being able to access basic services such as health and education, transport goods along roads that are maintained and make a living in a secure environment are all critical components to livelihoods. A focus on taxation may open up opportunities to create more resilient livelihoods by advocating for changes to how people are taxed.

A better understanding of how taxation works at the local level may also provide a contribution to debates around state-building in fragile and conflict-affected situations. These have often been framed around the idea that if the state can be supported to do more for its citizens in terms of delivering basic services and ensuring greater security and justice, then state-building outcomes will follow. Relatively neglected in debates about what creates legitimacy and so strengthens states are questions about how state actors could become less predatory and extractive. A focus on how people are currently taxed and whether this could be shifted to be less negative and better linked to provision of services could contribute to state-building debates.

Together with our colleagues at ICTD, we think this is an under-researched area, and our working paper makes the predictable point that evidence on the relationships between taxation and livelihoods in countries affected by conflict is thin. So, in looking at the intersection of taxes and livelihoods, our planned empirical research will be focusing on four key themes:

1) The full extent of formal and informal taxation incurred by individuals, households and small businesses. For example, as an overall proportion of household income or of business costs.

2) The positive material impacts of formal and informal taxation. That is, where paying taxes results in a benefit, whether it be formal and legal (such as receiving health care) or informal and unofficial (for instance, getting onto a food aid list).

3) The relationship between taxation and livelihood choices and behaviours. How does the extent and nature of taxation affect what people do in order to make a living? For example, do people in eastern DRC give up palm oil production because it’s too heavily taxed to be worthwhile?

4) The relationship between taxation and governance. Does the way people are taxed (formally and informally, corruptly and legally) affect their views of the legitimacy of the state? Here we will be exploring the potential transformative, socio-political effects of taxation.

We’d be keen to hear from other people working on these issues, anyone planning or already doing research asking similar questions, and examples from other contexts of how taxation – broadly defined to cover both its formal and informal dimensions – impacts on people’s ability to make a living both during and after war and violent conflict.


Tapas Chatterjee
There seems to be a confusion between 'Tax' and 'Corruption/ Bullying Politico' ....and the examples are from a particular area. I give example of India. in India, poor people are out of the 'Direct Tax Net'..... BUT.... they actually pay much more percentage of their earnings to Corruption and Opportunism. The less educated (generally) and lesser connected (to powerfull people) are often pressurised to bribe to run their shop, enrole their children in schools or making a ID card etc. .... are forced to pay more for their daily needs (as they require credit facility from the local shops). These people actually have no 'Say' in the society. The same must be occuring in other parts of the world. Hence... it is not a matter of Research & Study anymore. Without using money on another R & D.... we better start Ground Work on whatever Understanding we have. Thanks for reading.
Dick Tinsley
This is a very interesting and important concept that needs further review. I actually looked at this to some degree when on assignment in Afghanistan a few years back that resulted in adding a page to my website under "informal income". Unfortunately, most of these Taxes are unreceipted and simply go to the personal benefit of the civil officer collecting and unofficially endorsed by governments because of low basic salary, instead of improving civil services. This is also just below the service and can be easily if discretely documented. It has to be because business can not operated in a informational void and have to be able to fairly accurately estimate the informal "taxes" they will encounter. Please check the webpage and a couple of the linked pages looking at the overall suppressed economy and extend the civil services are financially stalled. The development community in trying to assist such governments need to be very careful that they don't inadvertently encourage additional informal taxes as may happen with certified seed programs. http://lamar.colostate.edu/~rtinsley/InformalIncome.htm . http://lamar.colostate.edu/~rtinsley/FinancialSuppressed.htm . http://lamar.colostate.edu/~rtinsley/FinanciallyStalled.htm . http://lamar.colostate.edu/~rtinsley/VarietyImprovement.htm .
Paul Harvey
Thanks for your comments Dick and we'll look forward to checking out the links and hopefully being able to follow up on some of the issues in our SRLC Afghanistan research programme. Thanks also for your comments, Tapas. I certainly take the point that action is needed and India is a great example of where some really exciting ground level work fighting corruption is happening. But I don't think that means that research isn't also needed. As well as documenting the impact of taxation (broadly defined) on livelihoods we hope that our work will eventually stimulate discussions about how initiatives to tax people more fairly could be taken forward. Your point on definitions and the types of payments poor people have to make is well taken. But our argument is that there are substantial grey areas between formal taxation and corruption and that understanding the full range of payments that people have to make to make a living, get their kids educated and stay healthy is what's important from the livelihoods perspective - whether the payments are labelled corruption, tax or somewhere in between.
Cris Cayon
Paul, thank you for sharing this blog. I have yet to fully read your working paper on this. But, I just want to advance some few notes. While I do not fully subscribe to the use of the term informal taxation, I actually like the whole concept of 'couching' those collections somehow in that term because they allude to various nuances in governance arrangements in several contexts e.g. weaknesses in legitimate states, states lacking in legitimacy, proxy governing entities in areas of fragility. Obviously, too, while informal taxation is differentiated from those that are codified they still refer to some quid pro quo arrangements in terms of security provisions, speed in transactions, maintaining a status of a long line of livelihood beneficiaries at a person, family or community level. From a livelihood perspective, is it possible that 'informal' taxation actually helps 'formalize' informal livelihoods which in some cases may dis-incentivise people's attempt to engage in secure livelihoods? Another note that I'd like to make is that many 'informal taxes' emerge after 'regular' taxes are satisfied. This is where corruption might play a role, or lack of accountability and 'unprofessionalized' civil service structures exist (as in the case of governments-in-transitions, or aged government regimes operating almost in perpetuity). Some friends are involved In a recently launched book by International Alert (http://www.afrim.org.ph/news_page.php?nid=117#.UdvbtuCGndk), a set of innovative researches shed light on informal economies in Mindanao (south of Mindanao). May I invite you to look at their findings as their book might be helpful to you and your team. Your research here is important for Mindanao as we begin to look at new sub-national governance arrangements hopefully as a result of the peace negotiations between the Philippine Government and the Moro Islamic Liberation Front (MILF). All the best, Cris
Apollo Gabazira
I realize that this consortium is working in Uganda, where the divide between formal & informal taxes Vs. corruption gets really blurred - in my opinion, all the three (3) are an unfair charge to the poor and vulnerable - in fact the poor bear the heaviest burden of tax, if tax was to be linked to their livelihoods. Let us take the recent example of official tax on mobile money transfers In Uganda - as we try to get the 'unbankable' into some sort of financial inter-mediation mechanism, is it right for government to start taxing mobile-money transfers? To what extent is this going to discourage the poor from using such service? Do the poor even have a choice anyway, apart from continuing using the service and suffer 'lost' income? What about tax on other commodities like Kerosene, school exercise books etc that we all know the poor can't avoid as it is passed on to them, albeit indirectly, via transport costs, taxation of big manufacturers in Kampala etc - these then pass it on to the poor..... But on the other hand, what choice has the government got? It needs revenue to run business and the poor being the majority of the population, need taxing - i suspect that in Uganda, informal taxation for the poor might not be that big a deal, but the extent to which services are provided to the poor by government, guaranteeing of their rights etc Of-course corruption is wide spread and we know that - not sure we need another round of research on that Perhaps Tapas has a point when he says that we have the facts, may not be all we need, but enough to focus on addressing the problem......i cant help but ask myself that if we did this research and got to know a little more than we do now, so what?

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Welcome to SLRC's blog.

This blog will feature reflections from our team of researchers on the practicalities of actually conducting research in conflict-affected situations. We will also be posting guest blogs written by key researchers and practioners working on livelihoods, basic services and social protection in conflict-affected situations.