SHOULD WE TAX THE HARD-TO-TAX?
The wisdom of man never yet contrived a system of taxation that
would operate with perfect equality. ~Andrew Jackson
1.1 INTRODUCTION
1.1.1 Background
This paper is part of a larger PhD thesis on tax evasion among hard-to-tax (hereinafter referred
to as HTT) sectors in developing countries, with a specific focus on the challenges faced in
administering the taxes levied on the income of self-employed professionals. HTT sectors
encompass farmers, professionals, and small and medium-sized firms.1 The HTT tax payers
are found in both the formal and informal economy- with taxpayers falling within a spectrum
of increasing and decreasing levels of formality.
Low compliance levels among the HTT are a problem for both developed and developing
countries; however, the extent and effects of evasion among these sectors is much larger in
developing countries. Despite the fact that many developing countries have legislation
providing for the taxation of HTT sectors, revenue authorities have largely been unable to
effectively administer the applicable tax legislation and rules, resulting in significant levels of
tax evasion that greatly erode an already limited tax base. Accordingly, the overall goal of the
James Alm, Jorge-Martinez Vazquez and Friedrich Schneider, ‘'Sizing' the Problem of the Hard-to-Tax’ in
James Robert Alm, Jorge Martinez-Vazquez and S. Wallace (eds), Taxing the Hard-to-Tax: Lessons from
Theory and Practice (Contributions to Economic Analysis, vol 268, Emerald Group Publishing 2005). Alm et
al. (2005: 4) explain that although electronic commerce and multinational corporations present real challenges
for revenue authorities, they do not fall within the definition of HTT.
1
larger PhD project is to determine why there is a gap between formal legislation and what
happens in practice, and how this gap can be closed.
Although this paper discusses the policy considerations around taxation of HTT sectors
in general, the larger PhD project focusses specifically on self-employed professionals.
Existing literature on tax evasion among the HTT in developing countries has focussed largely
on farmers and SMEs. The literature and data from government, research organisations and
academia on tax evasion among self-employed professionals is scant, at best; yet authors such
as Keen argue that most under-payment of taxes among the HTT is by professionals such as
doctors, lawyers, architects, etc.2 Tanzi and Shome have also acknowledged that tax evasion
is easier for professionals, particularly when they insist on cash payments, and also list doctors,
lawyers and architects as examples.3
Studies in Greece have found a high incidence of tax evasion among doctors, engineers,
educators, media and lawyers, both in urban and rural areas and among both high and low
income earners in those sectors.4 Waris et al. suggest that the revenue capacity of the shadow
economy in Kenya may have been underestimated by some of the available economic data and
that the potential revenue from the self-employed may be much higher.5 The larger project thus
looks at an important section of the HTT sector that has largely been under-researched.
2
Michael Keen, Taxation and Development-Again (International Monetary Fund 2012)
Vito Tanzi and Parthasarathi Shome, ‘A Primer on Tax Evasion’ [Palgrave Macmillan Journals] 40 Staff
Papers (International Monetary Fund) 807
4
Nikolaos T Artavanis, Adair Morse and Margarita Tsoutsoura, ‘Measuring Income Tax Evasion using Bank
Credit: Evidence from Greece’ Chicago Booth Research Paper No 12-25; Fama-Miller Working Paper
Available at SSRN: http://ssrncom/abstract=2109500 or http://dxdoiorg/102139/ssrn2109500
5
Attiya Waris and others, Taxation and State Building in Kenya: Enhancing Revenue Capacity to Advance
Human Welfare (Tax Justice Network 2009)
3
1.1.2 Developing Tax Policy
Developing an acceptable tax policy is arguably one of the most difficult tasks that the
government of any country has to undertake. While Adam Smith’s famous canons of taxation
- equality, certainty, convenience of payment and economy of collection6- come together rather
neatly on paper, in reality most countries struggle to come up with a tax regime that satisfies
all four canons. A tax that fosters equality may result in less than economical collection and
one that has achieved convenience of payment may not tick the equality box. Even one that
miraculously manages to balance all canons may still not meet with the approval of critical
taxpayers!
Tax by Design, the final report from the Mirrlees Review, acknowledge the difficulties
associated with balancing all four canons when designing a tax system, and explains that they
are not as comprehensive as they are always held out to be and ‘do not help with the really
difficult questions which arise when one objective is traded off against another.’7 The report
advocates for the ‘optimal tax theory’8 and suggests three rules of thumb that tax policy makers
can rely on in designing a tax system: simplicity, neutrality and stability.9
Neutrality refers to similar treatment for similar activities in order to minimise the
distortion of the behaviour of taxpayers in a bid to minimise tax liability. While the report does
acknowledge that neutrality is not always desirable or appropriate, it points out that in most
6
Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (London 1817)
Institute for Fiscal Studies and James Mirrlees, Tax By Design: The Mirrlees Review (Oxford University Press
2011) p. 22
8
“Optimal tax theory is all about the choice of a system of taxation that balances efficiency losses against the
government’s desire for redistribution and the need to raise revenue…The theory of optimal taxation begins by
clarifying the objectives of policy and identifying the constraints under which it operates. The tax system that
best achieves the objectives whilst satisfying the constraints is identified as the optimum.” Ibid 36
9
Ibid 39
7
instances, the lack of neutrality is unjustifiable and introduces unnecessary complexity and
inefficiency.10
Simplicity in tax law is a difficult concept to define; indeed the Mirrlees Report does not
purport to provide an exact definition; rather, it explains that the characteristics of a simple tax
system include transparency and low administrative costs and explains that neutrality and
simplicity are inextricably linked.
Stability means that the system should not be in a state of continuous change; according
to the Report, is important to avoid two extremes - inaction in the face of a ‘poorly designed
system’ on the one hand, and constant poorly thought-out changes on the other. Rather, the
Report advocates for the middle ground; ‘a clear and transparent method of making changes
to the tax system, and a clear long-term strategy for change.’11
It immediately becomes obvious, from the above discussion, that tax policy-making is a
complex and difficult affair; involving a delicate balance of different considerations. It
becomes even more complex when faced with the reality of hard-to-tax-sectors; designing
policy and legislation for these sectors is more challenging because of the typically low
compliance levels among these tax payers. So what do we mean by ‘hard-to-tax’ sectors?
10
The examples given of the latter include the difference in tax treatment between debt and equity and tax
treatment between different forms of business forms.
11
Studies and Mirrlees (n 27)
1.2 WHO ARE THE HARD-TO-TAX?
Myles et al accurately observe the existence of a plurality of terms which in some instances
refer to concepts whose meanings are not exactly the same making it harder to compare existing
studies on tax evasion.12 Schneider and Enste actually list 13 different terms that they say have
been “used synonymously or for different areas” by authors in this field.13
According to Carillo and Pugno, the underground economy consist of ‘activities which
are not registered, taxed or regulated but which produce for legal market.’14 Schneider and
Enste seem to adopt a wider definition and suggest that the underground economy comprises
both legal and illegal activities.15 In addition, they have used the terms underground, informal,
parallel and shadow economy interchangeably.16 Schneider and Williams take the view that
both the wide and narrow definition are valid; they explain that although in their work they
adopt the narrow definition17, they acknowledge that this narrow definition exists within a
“sub-set of a wider definition”.18 For purposes of this paper, the term underground economy
refers to the following broad definition encompassing both legal and illegal activities, supplied
by Schneider and Williams: ‘those economic activities and the income derived from them that
circumvent or otherwise avoid government regulation, taxation or observation.’19
12
Gareth Myles and others, Self-Employment Underreporting in Great Britain: Who and How Much? (Tax
Administration Research Centre 2014) 4
13
Friedrich Schneider and Dominik Enste, The Shadow Economy : An International Survey (2nd edn,
Cambridge 2013) 7
14
Maria Rosaria Carillo and Maurizio Pugno, ‘The Underground Economy and Underdevelopment’ (2004) 28
Economic Systems 257, 258
15
Schneider and Enste (n 33) 11
16
Friedrich Schneider and Dominik Enste, Hiding in the Shadows : The Growth of the Underground Economy
(International Monetary Fund 2002)
17
i.e., they exclude both illegal underground economy activities and activities in the informal household
activities.
18
Friedrich Schneider and Colin C. Williams, The Shadow Economy (Institute of Economic Affairs 2013) p. 25
19
Ibid 23
Schneider and Enste provide a helpful discussion on the dichotomy between the ‘legal
arm’ and the ‘illegal arm’ of the underground economy.20 They describe the legal arm as the
‘self-sufficient economy’ and the illegal arm as the ‘shadow or hidden economy.’
Within the shadow economy, Schneider and Enste distinguish between the irregular
sector (illegal production and distribution but legal output, e.g. operating a business without a
licence) and the ‘criminal sector’ (illegal production and distribution and illegal output, e.g.,
drug trafficking).21
They also divide the self-sufficient economy into the ‘informal sector’/ ‘alternative
economy’ on the one hand, and the ‘household sector’ on the other; the former refers to the
sector where market activities take place22 while the latter includes activities such as Do-itYourself work, home office work, baby sitting and exchange of goods.23
While Schneider and Enste use the term to informal sector to refer to activities such as
self-help organisations and counselling centres,24 Joshi et al adopt a wider definition that has
also been adopted in this paper. They begin by explaining that the term ‘informal sector’ was
originally proposed by Keith Hart in 197325; he defined the informal sector as comprising the
self-employed or those not earning wages in formal employment.26
In the 1970s the International Labour Organisation, in a widely read report on the
informal sector in Kenya, conceptualised this term and used it to refer mainly to small and
20
Schneider and Enste, The Shadow Economy : An International Survey (n 33) 12
Ibid
22
They distinguish the ‘informal sector’ and the ‘irregular sector’ on the basis of law enforcement; the law is
hardly enforced in the former while the latter is highly regulated.
23
Schneider and Enste, The Shadow Economy : An International Survey (n 33)
24
Ibid
25
Joshi, Prichard and Heady (n 23) 1326
26
Keith Hart, ‘Informal Income Opportunities and Urban Employment in Ghana’ (1973) 11 The Journal of
Modern African Studies 61
21
micro enterprises that were not regulated or taxed by the government.27 This ILO Report
identified the following characteristics of the informal sector:
(a) Ease of entry;
(b) Reliance on indigenous resources;
(c) Family ownership of enterprises;
(d) Small scale of operation;
(e) Labour-intensive and adapted technology;
(f) Skills acquired outside the formal school system; and
(g) Unregulated and competitive markets.28
In the 1980s, H. De Soto defined the sector as a ‘source of dynamism and growth held
back only by inappropriate government regulation’.29 This new school of thought viewed the
informal sector and formal sector as distinguishable on the basis of regulation or legal status;
it suggested that this sectors growth depended on deregulation and complete abolition of state
intervention.30
Joshi et al conclude by adopting the following description of the informal sector by
Kenyon:
It is important to recognize the heterogeneity of the ‘informal sector’,
encompassing as it does almost all sorts of activities, from the self-employed,
to small businesses employing a handful of workers to, in some developing
countries, quite large enterprises with several hundred employees. Some firms
may be registered with one set of authorities but not another, for instance, or
be registered but under-declare sales or workers for tax purposes.31
27
International Labour Organisation, Employment, Incomes and Equality; A Strategy for Increasing Productive
Employment in Kenya (ILO, Geneva, 1972).
28
Ibid 6
29
Joshi, Prichard and Heady (n 23) 1326
30
Hernando de Soto, The Other Path: The Invisible Revolution in the Third World (Basic Books 1989)
31
Thomas Kenyon, A Framework For Thinking About Enterprise Formalization Policies In Developing
Countries (The World Bank, 2007)
While Schneider and Enste divide the self-sufficient sector (i.e., the legal arm of the
underground economy) into the informal sector and the household economy, Joshi et. al. view
the household economy as a subset within the informal sector. The latter therefore present a
trichotomy within the informal sector comprising: the subsistence enterprises (or household
economy) which fall outside the tax regime entirely, micro enterprises and small businesses
that attract lower or preferential taxes like presumptive taxes and small and medium businesses
that under report their earnings in order to escape the formal tax regime and fall under the
preferential taxes rate. The latter group are able to under-report their income of ‘pretend to be
small’ because they are able to take advantage of their size, location, nature of business, and/or
administrative laxity or lapses by the revenue authority.
The above definitions and distinctions are complex and the fact that there is confusion
among writers in this area about the exact meaning of the prevailing terminology makes it even
more complicated. The exact definition of the term hard-to-tax is even more elusive.
Bird and Wallace explain that the term hard-to-tax encompasses much of the informal
economy, although, unlike Schneider and Enste, they do not seem to distinguish between the
terms ‘informal economy’, ‘shadow economy’ and underground economy’.32 From their
discussion however, it is clear that the three categories of informality they identify are similar
to the trichotomy of the informal sector by Joshi et.al.
Alm, Vasquez and Schneider provide a more concrete definition of the term hard-to-tax
that merits quoting:
Independently of the right definition or model, there is considerable consensus
in the tax literature regarding the identity of the HTT. Musgrave (1990)
identifies the HTT with small and-medium-sized firms, professionals, and
32
Bird and Wallace (n 23)
farmers. Similarly, Tanzi and Casanegra (1989) identify the HTT mainly with
individual proprietorships, farmers, and professionals. 33
It is important to unpack this definition in order to understand why these groups are deemed as
hard to tax and why other groups are left out of this definition. Alm, Vasquez and Schneider,
in the same article, acknowledge that all taxpayers are hard to tax for various reasons; however,
they take the view that some tax payers are harder to tax than others and classify those
taxpayers as HTT. They point out the following typical characteristics of the HTT34:
a. They do not register themselves voluntarily with the revenue authority;
b. They do not keep proper books of accounts showing their income and expenditure;
c. They are not prompt in filing tax returns;
d. There is a significantly higher rate of tax evasion among these taxpayers
In addition, the three authors explain that there is a ‘general consensus’ (among the
authors in this field that they have cited) that multinational enterprises and businesses engaged
in electronic commerce fall outside the definition of HTT. Looking at the four characteristics
above, one could argue that these groups are excluded because:
a. They are more likely to engage in complex tax avoidance schemes rather than basic tax
evasion;
b. They generally employ highly qualified accountants to keep proper and detailed books
of accounts and will comply with accounting standards;
c. They generally engage the services of highly skilled tax advisors who will file their tax
returns on time;
33
34
Alm, Vazquez and Schneider (n 1) 4
Ibid 3-4
d. Because of the nature and form of these taxpayers (incorporation and compliance with
registration requirements), they will in almost all cases be voluntarily registered with
the revenue authority.
Other authors have also tried to explain why some sectors are considered hard to tax.
Terpker answers this question by addressing the difficulties associated with taxing the HTT in
the informal economy.35 He explains that professionals and small and medium-sized businesses
in the informal economy ‘have genuine difficulty in keeping even simple records and make
little or no use of banks and financial instruments’.36 These businesses in the informal sector
have poor management systems and financial structures; they are normally controlled by
owner-managers and a network of close family members, professional associates, friends and
employees.'37 In addition, because the operations of these businesses are highly simplified, their
cost of tax compliance is much higher leading most of them to avoid compliance altogether.
Musgrave provides some additional insight into the challenges associated with taxing the
HTT in developing countries.38 He explains that the HTT operate mostly in a cash-based
economy and either do not keep proper records or the revenue authority has a difficult time
extracting the records from them; when the revenue authority does succeed in doing so, it is
35
It is important, at this stage, to point out that these professionals and small and medium-sized firms may or
may not fall within the definition of the informal sector suggested by Joshi et al and Schneider and Enste; this is
why Bird & Wallace state that HTT covers much rather than all of the informal sector. The HTT includes
players from both the formal and informal sectors. “In the informal sector, the hard-to-tax may include
unregistered merchants and professionals who are involved in cash transactions or even barter. …these
individuals may have genuine difficulty in keeping even simple accounts, and may not be familiar with banking
and other financial transactions. In the formal sector, the HTT may include professionals with college
educations, as well as small manufacturing firms and commercial farms who are capable of keeping accounts
and who often do so for purposes other than paying taxes. Thus both types of the HTT may or may not operate
in a cash economy, and they may or may not be capable, but are always unwilling, to provide the tax authorities
with relevant information…” ibid 4-5
36
Seth Terkper, ‘Managing Small and Medium-size Taxpayers in Developing Economies’ (2003) 29 Tax Notes
International 211, 212
37
Ibid
38
Richard A Musgrave, ‘Income Taxation of the Hard-to-Tax Groups’ in Bird & Oldman (ed), Taxation in
Developing Countries (4th edn, The John Hopkins University Press 1990)
difficult to ascertain the accuracy and validity of those records.39 He adds that because the HTT
occupy a huge chunk of the economy of developing countries, revenue authorities are faced
with a large number of individual taxpayers and the associated high cost of collection with the
risk of minimal returns. Musgrave explains that these revenue officials will more often than
not choose to pursue a small number of large taxpayers and largely ignore the large number of
small taxpayers. Musgrave argues that the HTT in the informal economy (he refers to them as
small taxpayers) should be treated differently from the HTT in the formal sector; we will return
to this later.
Based on the foregoing terminology confusion, it suffices to say, in the words of Kanbur,
that the existing literature in this field ‘is in a mess’.40 Kanbur explains that the consequence is
that ‘There is a plethora of definitions, which leads to incoherence in analysis and, at its worst,
major policy failures’.41 What Keen suggests, and what is the primary goal of this project is
this:
What is needed is to go beyond the comfort of broad labels and probe deeper
into the anatomy of non-compliance, and how tax design and implementation
should reflect and address it. These are complex issues, but facing them head
on at least points to potentially fruitful areas of inquiry and action.42
1.3 SHOULD THE HARD-TO-TAX BE TAXED?
This is an extremely important policy question and it is at the centre of the discussion in this
paper. The way in which this policy question is answered has significant implications for the
39
Ibid 297-299
Ravi Kanbur, Conceptualizing Informality : Regulation and Enforcement (Cornell Univiversity, Department
of Applied Economics and Management 2009) 2
41
Ibid 3
42
Keen (n 23) 16
40
overall tax policy of many countries. While this question may be asked about both developing
and developed countries, it is of particular importance for developing countries.
One reason for this is that developing countries record a higher number of taxpayers
falling within the HTT sectors than developed countries do. According to the table below, the
informal sector43 supplies the lion’s share of employment opportunities in urban areas, new
jobs and non-agricultural employment opportunities in developing countries; in Africa, for
example, the informal sector provides 93% of the new job opportunities and 61% of the job
opportunities in urban areas.
Source: Chen (2001)44
Woodruff explains that in comparing the informal economy45 as a percentage of GDP
and taxes as a percentage of GDP, the former is higher in developing countries while the latter
is higher in many OECD countries. In Kenya, for example, taxes are approximately 20% of the
GDP while the informal economy is approximately 40% of the GDP; the variances are even
higher in countries such as Liberia, Honduras and Georgia.46
43
The fact that this sector comprises a significant number of HTT taxpayers merits reiterating.
Martha Chen, ‘Women in the Informal Sector: A Global Picture, the Global Movement’ (2001) 21 SAIS
Review
45
Woodruff (n 7) Note that he uses the terms informal economy and shadow economy interchangeably but his
description of these terms suggests that he uses them to refer to the sector referred to as ‘the informal sector’ by
Joshi, et al.
46
See graphs below.
44
Source: Woodruff (2013)47
Source: Woodruff (2013)48
Another reason why this policy question is even more critical for developing countries is
that they tend to have much small budgets and fewer resources for tax collection compared
with developed countries.49 These limited resources are often utilised to pursue larger and more
47
Woodruff (n 7)
Ibid
49
Musgrave (n 58), Cheeseman and Griffiths (n 16)
48
visible taxpayers, tax-avoiding multinational enterprises (for legitimate and possibly political
reasons), and taxes such as Pay As You Earn (PAYE) for which compliance levels are relatively
higher because the burden of compliance lies with a third party. In other words, developing
countries elect to use their scarce resources to collect taxes where they are somewhat
guaranteed a relatively simpler but significant revenue collection.
1.3.1 Arguments against Taxing the Hard-to-Tax
1.3.1.1 The High Cost of Ensuring Compliance
Taxing the HTT is often not a high priority for revenue authorities in developing countries
because of the high cost of ensuring compliance and the high risk of low returns.50 As
mentioned above, these authorities are challenged by limited resources; yet enforcing
compliance among numerous individual taxpayers and small and medium sized enterprises,
many of whom are hard to identify and are not captured in the system, can be an expensive
venture. These taxpayers are able to evade the taxman with relative ease because of their size,
nature of their businesses, informal nature of their management and accounting structures and
sometimes even geographic location.
Understaffed and under resourced revenue authorities therefore find it quite costly to
identify, pursue and audit these individuals and businesses. Alm et al explain that the policy
decision to focus on large taxpayers does make sense ‘because scarce resources for tax
enforcement can be much more productive in the development of large taxpayer units’.51
1.3.1.2 Technical Expertise Constraints
This argument and the preceding argument are linked. Taxing the HTT is complex and difficult,
even for countries that have the resources to levy and collect these taxes. Taxing the HTT
50
51
Musgrave (n 58), Alm, Vazquez and Schneider (n 1), and Keen (n 23)
Alm, Vazquez and Schneider (n 1)
therefore requires clear policies, sound legislation, and the skills and technical competence to
administer and collect the tax; these skills are not always well developed in many developing
countries.52
Cheeseman and Griffiths have written on taxation in sub-Saharan Africa, using Kenya as
a case study. They acknowledge that Kenya, like many developing countries, faces technical
expertise constraints and would need to invest heavily in its tax administration in order to tax
the HTT effectively. They argue that in light of the resource constraints that Kenya faces, it
may not be prudent to spend those limited resources investing in the revenue authority,
purchasing expensive and complex information technology system, and improving revenue
administration in order to tax the HTT successfully.53 They therefore take the position that
these resources should, instead, be utilised to improve service delivery in the health and
education sectors and to pay civil servants better wages; in this way the government would
indirectly improve the ability of its citizens to pay taxes.
Keen explores this argument and poses a pertinent question that perhaps many would
ask:
Simply from the perspective of efficiently allocating administrative resources,
for instance, does it make sense to devote more effort to taxing smaller
businesses rather than, for instance, improving refunding for exporters under
the VAT or tackling aggressive tax planning by large multinationals?54
The general argument therefore seems to be that taxing the HTT requires highly skilled
and trained policy makers and revenue officials; technical expertise that would cost
developing countries, already struggling with limited budgets, quite a lot to secure.
52
Mascagni, Moore and McCluskey (n 6)
Cheeseman and Griffiths (n 16)
54
Keen (n 23) 16
53
1.3.1.3 Poverty
Cheeseman and Griffiths argue, in their case study on Kenya, that taxing the informal sector in
the country would push their citizens who live just above the poverty line into even further
poverty and those who are already living below the poverty line would be reduced to complete
and abject poverty.55 In addition, they are of the view that taxes targeting the informal sector
in Kenya do not yield significant revenue because the revenue just isn’t there; the economy is
largely made up of poor and untaxable individuals. They therefore conclude that trying to tax
the informal economy before increasing wages and supporting formalisation of businesses
would amount to putting the cart before the horse and that the taxation of this group should not
be used as a short term goal to close the revenue gap.
1.3.1.4 Vulnerability of Small Firms
The taxation of the HTT necessitates the identification and registration of small firms and sole
proprietors; in addition, their registration increases the level of interaction that they have with
revenue officials. Revenue officials may request [or indeed demand] access to their books of
accounts, bank statements, business premises, employee records and perhaps even evidence of
proper registration and administrative compliance.
It has been argued that in situations like these, the small business or sole proprietor is in
a vulnerable position and if the law does not provide for proper checks and balances to guard
against unfair or undue exercise of powers by revenue officials, the exercise can easily descend
into a vicious cycle of extortion, bribery, intimidation and corruption. Corruption is a rampant
problem in many developing countries including Kenya and therefore this is a real concern.
This unfortunate situation would defeat the purpose of introducing the tax since the government
will not realise the revenue it anticipated, the growth of the informal economy and its move
55
Cheeseman and Griffiths (n 16)
towards formality will be stifled and the threat to the legitimacy of the revenue authority may
dampen the tax morale among other tax payers as well.
Joshi et al explain that taxation of the HTT may ‘make firms vulnerable to unequal
treatment and harassment by making them more visible to state authorities’.56 They point out
that it is important to identify the conditions under which formalisation of small businesses for
purposes of taxation would be beneficial. To support this position, they cite several studies into
informal sectors in ‘border areas in fragile and conflict-affected states’; these studies show that
in certain instances, the registration and attempted taxation of these businesses may disrupt a
valuable source of sustenance and expose the traders and businesses to new forms of
vulnerability. Joshi et al. highlight a question posed by Meagher and Lindell: ‘Does taxing
informal traders strengthen public accountability, or just create new avenues of predation?’57
1.3.1.5 Stifling Growth and Entrepreneurship
There is some evidence from previous studies that formalisation and taxation of informal
businesses may stifle growth and entrepreneurship. McKenzie and Sakho conducted a study on
the effects of formalisation and taxation on informal business; their conclusion was that while,
taxation may increase the profit margins of certain firms, taxation actually lowers the profit
margins of very small firms and larger firms.58 Chen also argues for an economic paradigm
shift or what she terms as ‘economic diversity’; an economy where the informal and the formal
operate together side by side.59 She views some level of informality as inevitable and good.
While she doesn’t go as far as stating that the informal businesses should not be taxed; she does
56
Joshi, Prichard and Heady (n 23)
Ibid 1331
58
David McKenzie and Yaye Seynabou Sakho, ‘Does it Pay Firms to Register for Taxes? The Impact of
Formality on Firm Profitability’ 91 Journal of Development Economics 15
59
Martha Alter Chen, The Informal Economy: Definitions, Theories and Policies (WIEGO Working Paper No
1, August 2012)
57
advocate for a model that creates an equal and fair playing field for both the formal and
informal to thrive side by side.
From the discussion above, it is clear that taxing the HTT is complex, difficult, expensive,
and maybe even go against reason in some instances. In addition, it may not always yield
significant revenue. Does this therefore mean that the HTT should never be taxed?
1.3.2 Arguments for Taxing the Hard-to-Tax
1.3.2.1 Raising Revenue is a Legitimate Policy Goal
To begin with, the very basic reason why a country may want to tax the HTT is to increase the
revenue that it generates from this group; this is a legitimate and worthy policy goal. In the face
of increasing budgetary constraints, it is logical that states, especially developing ones, would
want to increase the revenue collected from all sectors of the economy. The HTT should not
be an exception merely because they are difficult to reach.
While it is true that in most cases taxing the HTT does not yield significant revenue, it is
also true that revenue collection from any given tax can improve over time. If existing
legislation evolves to meet the administration challenges, compliance can become easier as the
revenue authority learns how to collect the tax more effectively and efficiently. In the case of
the HTT, this process may take longer but, with consistency, constant evaluation of the
effectiveness of the legislation and strategic amendment of the law, the sectors can bring in
significant revenue.
The argument here is that increasing the revenue collected from the HTT is a long-term
policy goal; in treating it as a short-term policy goal, developing countries are more likely to
abandon their efforts because of initial disappointing low collections. When overnight success
is expected but not realised, these countries are more likely to begin engaging in haphazard and
uncoordinated statutory amendments and ultimately, premature repeal of the legislation.
When it is viewed as a long-term policy goal, and when the indirect benefits of taxing
the HTT are taken into account, the review of the law is more likely to be planned, systematic
and targeted and there is a greater chance that the government will realise its policy goals
because those are effectively tied to the legislation. Keen summarises it this way: in order to
tax the HTT effectively, policy makers ought ‘to be aware that fundamental strengthening of
revenue collection will be largely a matter of persistent and unspectacular effort’.60
1.3.2.2 The Danger of Lumping Different Taxpayers Together
As discussed above, Cheeseman and Griffiths argue that taxing the informal sector has the
effect of making the poor even poorer. It can however be argued that this only holds true when
the government attempts to tax those in the informal sector who are engaged in subsistence
activities or whose income falls very close to the subsistence level. Cheeseman and Griffiths
are correct in arguing that the taxation of this group would lead to extreme levels of poverty
among those who are already struggling to make ends meet.
The HTT does not, however, comprise only of subsistence producers. In the introductory
section of this Chapter, we saw that the HTT includes players in both the formal and informal
economy and the HTT may or may not be operating in the cash-based industries. This diverse
group of taxpayers includes farmers, professionals, and small and medium-sized businesses
whose income may fall well above the subsistence threshold; some of these may even enjoy an
income that falls within the standard income tax threshold but deliberately stay in the informal
sector to avoid the tax man.
60
Keen (n 23) 23
In fact, Keen argues that most under-payment of taxes among the HTT is by professionals
such as doctors, lawyers, architects, etc. ; yet classifying them as ‘informal’ may appear
‘wrong’.61 Mascagni et al also argue that ‘informality’ also occurs within firms in the formal
sector.62 Even Terkper includes large and medium entities that do not comply with tax
legislation and in respect of which the revenue faces enforcement challenges among the HTT.63
As Keen points out, the self-employed are responsible for declaring their income and
paying tax on the income declared; they can therefore opt not to declare any income and evade
taxes completely, or under declare their income and pay as little tax as possible. In jurisdictions
where the revenue authority does not have sufficient capacity or resources to closely monitor
the self-employed, it becomes very hard to effectively tax this group. In fact, being selfemployed quickly becomes very attractive to the employed.64
Therefore, while it is true that the HTT does in part comprise of poor subsistence
producers and traders, informality is not always an indication of poverty. In some instances,
informality is a deliberate choice taken by traders or professionals in order to avoid-over
regulation by the government, or conversely because the government has raised (regulatory
and financial) barriers to formalisation.65
According to the Voluntarist School of Thought on the informal economy, a theory
propagated by William Maloney, the self-employed, particularly male entrepreneurs,
voluntarily enter the informal sector in order to earn a living while avoiding the costs of
formalising including taxes and social protection contributions.66 Maloney takes the view that
61
Ibid 16
Mascagni, Moore and McCluskey (n 6) 18
63
Terkper (n 56)
64
Musgrave (n 58)
65
Woodruff (n 7)
66
William F. Maloney, ‘Informality Revisited’ 32 World Development 1159
62
the informal sector should be viewed as ‘the unregulated, developing country analogue of the
voluntary entrepreneurial small firm sector found in advanced countries, rather than a residual
comprised of disadvantaged, workers rationed out of good jobs.’ While this might not be true
of all players in the informal sector and/or the HTT, it is certainly true of a good number of
them.
In fact, the lumping of different taxpayers together, and applying a single tax policy and
tax legislation to them greatly impedes all efforts to tax them effectively. Martha Chen
discusses the conceptual framework of informality postulated by Kanbur and demonstrates how
this ‘lumping’ can defeat legitimate policy goals.67 Kanbur demonstrates his point using a
hypothetical scenario where the world economy operates unregulated and regulation is then
introduced.68 He explains that the players in the economy then have to choose between four
different responses to the new regulations:
Player A: This player will choose to remain within the scope of the new rules and play
according to the rules;
Player B: This player will choose to remain within the scope of the new rules but not play
according to the rules (this has an element of illegality);
Player C: This player with modify their activity in order to fall outside of the scope of
the new rules and in that way avoid complying with them;
Player D: This player already falls outside the scope of the new rules anyway so doesn’t
need to comply with them.
67
68
Chen (n 78)
Kanbur (n 60) 7
Kanbur then goes on to explain that if we had to apply the labels ‘formal’ and ‘informal’
to these four players, we would most likely describe player A as playing in the formal sector
and describe the other three players as playing within the informal sector. That is where the
problem begins; players B, C and D are obviously very different. B is informal but also illegal;
C is informal and legal but has deliberately structured themselves in a certain way in order to
be informal; D was out of the scope of the new rules to begin with so the regulations does not
affect them at all.
It begins to become clear that using a single term like ‘informal sector’ obscures these
subtle differences and does not enable us handle each case on its merits. Chen puts it this way:
Kanbur argues that using a single label, “informal,” for B, C, and D obscures
more than it reveals—as these are distinct categories with specific economic
features in relation to the regulation under consideration. While
acknowledging that it is useful to have aggregate broad numbers on the size
and general characteristics of the informal economy, Kanbur concludes that
disaggregation provides for better policy analysis.69
In summary, it is important to underscore two points. One is that the term ‘informality’ is quite
confusing and loaded; once it is unpacked, a strong argument for using a clearer term is
inevitable. This is why Keen says using the term HTT, the term used in this paper, ‘is much
closer to the mark’.70
The second point is that while Cheeseman and Griffiths have made a good point
regarding poverty and taxation of the informal economy, the term informal economy is quite
loaded and may well include taxpayers who cannot accurately be classified as ‘poor’.
69
70
Chen (78) 11
Keen (n 23) 16
It therefore begins to emerge that once this disaggregation takes place, it becomes
difficult to justify the failure to tax the HTT on grounds of poverty. It is difficult to justify a
sector’s privileged position in tax legislation merely because the revenue authority finds it
difficult to tax that sector. This raises equality issues which are discussed below.
1.3.2.3 The Equality Principle
One of the canons of taxation postulated by Adam Smith is equality. The principle of ‘equality’
connotes notions of ‘fairness’; fairness means that the tax burden must be distributed as equally
as possible among citizens. While this principle is usually used to justify progressive taxes, in
the context of this paper, it is used to put forward the argument that it is not equitable to collect
taxes from those who are ‘easier’ to tax such as those in employment, while categorising other
(potential) taxpayers as hard to tax, and pursuing this latter group less aggressively or leaving
them out of the tax net altogether.
The argument here is that although it may be impossible to achieve comparable levels of
compliance in all sectors of the economy, the question about whether or not the HTT should
be taxed should not be the focus. As explained above, this approach would eventually make
certain sectors, business forms or occupations more attractive because of the ease with which
one can evade tax and existing taxpayers may begin to migrate to those sectors thereby
exacerbating the problem.
The better approach is to ask how the HTT should be taxed and not if they should be
taxed. The main argument in this paper seeks to answer the former question by advocating for
the setting of clear and coherent policy goals for taxing the HTT, designing legislation or
amending existing legislation to align them with these goals, and amending the law when
necessary in order to keep moving forward.
While collections from these sectors may initially be discouraging, the indirect benefits
of taxing them may well be worth the effort and as the efforts become more efficient, the
collections may improve. Some of these indirect benefits include boosting the tax morale of
other taxpayers, creating a culture of tax compliance in the nation, encouraging citizens to
advocate for better governance, and encouraging formalisation of informal firms.
1.3.2.4 Tax Morale
When citizens feel that the tax regime is ‘fair’ or reflects the principle of equality explained
above, they are more likely to willingly pay their taxes. When a group of taxpayers perceive
the system as favouring a particular group, they could begin to feel disgruntled and may start
to devise ways to either fall within that favoured group or to evade the taxes that they are
supposed to be paying.
For example, if a taxpayer in employment knows farmers or self-employed professionals
who are enjoying untaxed income, and who, it seems, are unlikely to be pursued and penalised
by the revenue authority, they may be tempted to quit employment and pursue self-employment
or farming as well, or retain their job but pursue additional undeclared income from part-time
self-employment.
Kirchgässner puts it this way:
Fairness’ is, of course, a broad term that can include quite a lot. If we consider
this in more detail, it becomes obvious that reciprocity plays an important role:
tax evasion seems to be more morally justified (objectionable) the more others
evade taxes as well (comply).71
Gebhard Kirchgässner, ‘Tax Morale, Tax Evasion and the Shadow Economy’ Department of Economics,
University of St Gallen, p. 11 <http://core.ac.uk/download/pdf/6387099.pdf> accessed 28.04.2015
71
In a study on why people pay their taxes even when the risk of one’s evasion being detected is
low, Frey and Torgler drew from two previous studies which concluded that where one
perceives that the tax rates are unequitable to their disadvantage, they begin to develop feelings
of anger towards the system and will then alter their behaviour, for example by evading taxes,
in order to modify the perceived unfairness.72 They use a different approach from the one taken
in those two studies to test the validity of this hypothesis. The sample for the study by Frey and
Torgler is drawn from less developed countries in Eastern Europe more developed countries in
Western Europe; however the result is the same for both. They find that taxpayers are indeed
influenced by the behaviour of other taxpayers. They express their findings in their conclusion
in the following terms:
An individual taxpayer is influenced strongly by his perception of the behaviour
of other taxpayers. If taxpayers believe tax evasion to be common, tax morale
decreases. Alternatively, if they believe others to be honest, tax morale
increases. Using recent data for Western and Eastern European countries, we
find strong empirical support for the hypothesis. The size of the effect is
substantial and the results remain robust.73
In conclusion, there is a good basis for arguing that taxing the HTT is important in order to
boost or maintain the tax morale among other taxpayers in the economy. If the other taxpayers
feel that they are carrying the tax burden unfairly, it crushes existing tax morale and encourages
them to look for ways to evade that tax burden.
1.3.2.5 Culture of Tax Compliance
In some developing countries such as the relatively young post-colonial nations in Africa,
the culture of paying tax to a central government is not as entrenched as it is in some
jurisdictions. In the United Kingdom for example, income tax was introduced in 1799 by the
Bruno S. Frey and Benno Torgler, ‘Tax Morale and Conditional Cooperation’ Berkeley Program in Law and
Economics, Working Paper Series <http://www.escholarship.org/uc/item/3rd3f982> accessed 29.04.2015
73
Ibid 24
72
then Prime Minister William Pitt the Younger in order to cover the cost of the Napoleonic
Wars.74 The culture of paying income tax has therefore had time to evolve and become
entrenched in the minds and lives of the people over several centuries.
Over and above ensuring tax morale among other taxpayers, taxing the HTT can play the
important role of developing a culture of taxpaying among all sectors of the economy. Joshi et
al suggest that one of the indirect benefits of taxing the informal sector is ‘to bring firms into
the tax net, thus ensuring higher tax compliance if they expand over time.’75
1.3.2.6 Encouraging Firm Growth
As discussed above, some authors take the view that the taxation stifles growth and
entrepreneurship especially among very small or large firms. In a study on formalisation in Sri
Lanka, del Mel et al concluded, based on the results of their study, that firms ‘don’t appear to
get the more touted benefits of formalizing, such as increased access to credit, obtaining
government contracts, or participating in government programs’.76
Yet, there is also a significant and growing amount of research suggesting that taxation
may actually encourage firm growth by enabling those firms to access credit facilities, enjoy
state protection, and benefit from government contracts.77 The growth among these firms is
admittedly not heterogeneous as some firms enjoy higher levels of growth, others enjoy only
modest levels of growth and the rest register no growth. Joshi et al discuss various studies
including: a study on Mexico which showed that formalisation on forms through various means
74
http://www.parliament.uk/about/living-heritage/transformingsociety/privatelives/taxation/overview/incometax/
75
Joshi, Prichard and Heady ( n 23) 1329. They do qualify this by explaining that this argument is more
intuitive than evidence based.
76
Suresh de Mel, David McKenzie and Christopher Woodruff, ‘The Demand for, and Consequences of,
Formalization among Informal Firms in Sri Lanka’ 5 American Economic Journal: Applied Economics 122, p.
148. It is important to point out that they noted the fact that the firms that formalised did realise some modest
increases in their profits, potentially as a result of the fact that they began to advertise and issue their customers
with receipt books thus growing their customer base.
77
Joshi, Prichard and Heady (n 23)
including taxation positively affected the profits of those firms and allowed them to reach their
optimal size78; a study on SMEs in Vietnam showed that formalisation positively impacts their
profits and investment79; and a study on micro firms in Bolivia indicated that registration for
tax purposes increase the profits of medium sized businesses80. According to Joshi et al., the
Mexican study by Fajnzylber et al. explored whether there was a difference in benefits to firms
that began to pay taxes in order to access the benefits of formalisation and benefits to firms that
began because they were caught out by the revenue authority. They found that ‘paying taxes
resulted in a benefit for all firms, leading to at least a 20 percent increase in profits, regardless
of whether they were caught or willingly compliant.’81
Joshi et al. weigh the different findings from the various studies and conclude with this
helpful middle-ground view: ‘On a balance, there is now a convincing body of evidence that
formalisation can drive broader economic gains, though there remains significant uncertainty
about whether the smallest micro firms are likely to be beneficiaries’.82 In addition, they note
the power relations between the state and the citizen also play a significant role in determining
whether entering the tax net benefits businesses or not. It is important to reiterate once more
that corruption poses a significant challenge in developing countries and if law and policy do
not provide protection for firms that are beginning to formalise, their growth would indeed be
stifled by such practices.
Pablo Fajnzylber, William F. Maloney and Gabriel V. Montes-Rojas, ‘Releasing Constraints to Growth or
Pushing on a String? Policies and Performance of Mexican Micro-Firms’ (2009) [Routledge] 45 The Journal of
Development Studies 1027
79
John Rand and Nina Torm, ‘The Benefits of Formalization: Evidence from Vietnamese Manufacturing SMEs’
40 World Development 983
80
McKenzie and Seynabou Sakho (n 77)
81
Joshi, Prichard and Heady (n 23) 1330
82
Ibid
78
1.3.2.7 Governance and Democracy
The link between the collection of taxes and agitating for better governance manifests in the
history of various nations including the United Kingdom and the United States of America.
According to the UK Parliament website83 the development of the UK’s Parliament is
significantly linked to the monarchy’s need to raise taxes in order to fund various wars. The
website goes on to explain that whenever the reigning monarch approached Parliament for
consent to levy additional tax, Parliament, which was the representative of the people who
would be affected by the new revenue collection, ‘could ask a favour back again and often
used the King’s desperation for money to get what it wanted’.84 The raising of taxes in England
in the 13th and 14th centuries therefore led to an expansion in the bargaining space between the
monarch and Parliament.
The debts that arose from the wars fought by the various monarchs, did not only lead to
the growth of parliamentary supremacy in the UK, it also let to the fight for independence and
self-governance in the United States of America. After Britain defeated France during the
Seven Years’ War of 1756-1763, it was left with massive post-war debts and insufficient
resources to defend its American colonies. According to the British Library website85, the
British government introduced various taxes in the colonies in order to finance the cost of
defending them including the 1764 Sugar Act, the 1765 Stamp Act, the 1765 Quartering Act,
the 1766 Declaratory Act which repealed the Stamp Act but restated the Crown’s right to tax
the colonies, and the 1767 Townshend Revenue Act. The colonies vehemently opposed these
statutes and in 1765, the Virginian Assembly issued the Virginian Resolution by which it
refused to comply with the later repealed Stamp Act. The colonies were completely against
83
United Kingdom Parliament, <www.parliament.uk> accessed 12.05.2015
http://www.parliament.uk/about/livingheritage/evolutionofparliament/originsofparliament/birthofparliament/overview/edward/
85
The British Library, ‘Online Gallery : The American Revolution’
<http://www.bl.uk/onlinegallery/features/americanrevolution/> accessed 12.05.2015
84
‘taxation without representation’ and it was these sentiments that led to the American
Revolution and eventually independence.
The levying of taxes by Britain led to agitation by the colonies leading to several
consequences: the monarch was forced to repeal the Stamp Duty Act in 1766, the colonies
began to demand responsiveness and their right to representation and eventually Britain had to
grant them independence.
The relationship between the paying of taxes on one hand and governance and democracy
on the other has also been extensively discussed in previous studies. Joshi et al. summarise the
themes that emerge from the literature as follows: the state’s responsiveness and accountability
to taxpayers may encourage quasi-voluntary compliance; tax payers are more likely to demand
state accountability and responsiveness; and the state’s effort to tax the informal sector ‘could
catalyse collective action and political engagement’ by their associations thus enhancing the
dialogue and bargaining space between the two sides.86
The authors briefly discuss the following studies that supply some evidence for the link
between taxation and governance: a study into the efforts by Ghana’s government to tax
informal sector firms, efforts that increase the bargaining space between their associations and
the government87; a study into the presumptive taxation of small firms in Ethiopia that triggered
greater public engagement and prompted the government to engage the business community in
the implementation of the tax88; and the study into formalisation in Sri Lanka where de Mel et
al. found that firms that began to pay taxes began to trust the state more even if the formalisation
86
Joshi, Prichard and Heady (n 23) 1331
Anuradha Joshi and others, ‘Associational Taxation:A Pathway into the Informal Sector?
’ in Deborah Brautigam, Odd-Helge Fjeldstad and Mick Moore (eds), Taxation and State-Building in
Developing Countries (Cambridge University Press 2008)
88
Wilson Prichard, ‘Taxation, Reponsiveness and Accountability in Sub-Saharan Africa’ (DPhil thesis, Institute
of Development Studies 2010)
87
and subsequent taxation did not lead to increased profit levels89. Fjeldstad et al. also discuss
the link between governance and taxation in their publication on the views of Africans on
taxation.90 It cites a study conducted into local government responsiveness in sub-Saharan
Africa which found that ‘African citizens who complied with tax payments are not more likely
to insist on responsive governance and accountable local leadership’.91 However, Fjeldstad et
al. criticise this study and note that it focused on local government responsiveness and
overlooked the possibility that the link between taxation and responsiveness at the national
government may be much stronger. They conclude that the study ‘…cannot draw any definitive
conclusions about the presence or absence of a fiscal contract between citizen and state in
these African societies’.
In conclusion:
Tax obligations can trigger demands for greater responsiveness and
accountability, better management of public expenditures, improved public
services, more efficient state institutions, and stronger oversight by Parliament
and civil society.92
1.4 CONCLUSION
The main objective of this paper has been to attempt to address the difficult question about
whether or not the HTT should be taxed. The three main questions that have been tackled in
this section are: Who are the HTT? How are they different from other groups within the
economy? Should the HTT be taxed? These questions have been tackled through an extensive
89
de Mel, McKenzie and Woodruff (n 94)
Fjeldstad, Schulz-Herzenberg and Hoem Sjursen (n 23)
91
Ibid 31
92
OECD, ‘Taxation and Governance’ in Tax and Development: Aid Modalities for Strengthening Tax Systems
(OECD Publishing 2013) <http://dx.doi.org/10.1787/9789264177581-6-en>
90
literature review; there is a significant amount of research in this area and these previous studies
have been extremely helpful in laying a sturdy foundation.
The most significant challenge faced in an attempt to meet the objective of this paper has
been the terminology confusion in this field; because there are no universally accepted
definitions for terms such as informal sector, underground economy, shadow economy, black
economy, and hard-to-tax among other fuzzy or vague terms, authors in the field have tended
to use the terms interchangeably and in different ways. This has made it quite difficult to
compare existing literature and understand where a particular piece fits in within the larger
picture. For example, although the term hard-to-tax has been defined for purposes of this study,
certain groups that fall within the HTT category (within the meaning used in this paper) also
fall within what is sometimes termed as the informal sector. The consequence is that in certain
sections of the paper, it has been impossible to avoid using the term informal sector because
that is the term that is used in the relevant literature that supports the argument under
consideration at that point. It is acknowledged that this might confuse the reader but it is hoped
that the reader will bear in mind the definitions and parameters set out at the beginning of the
paper and read the rest of the paper with those in mind.
Although it is clear from the objective of this research that it is undertaken from the
position that developing (and developed) countries should tax the HTT; it is important to
explain why. As discussed above, there are various arguments on both sides of the debate, and
many of these arguments are sound and convincing. It is accepted that taxing the HTT is
expensive, complex and perhaps even risky since it may expose some businesses to harassment
by unscrupulous tax officials; indeed, it may even present political challenges for politicians
who sometimes take the view that attempting to tax this segment of society could threaten their
voter base. The author accepts that taxing subsistence producers is not only economically
unsound, but also unequitable. The author also accepts that taxing the HTT is expensive and
complex and requires careful consideration.
Yet, despite these arguments, more and more developing countries are choosing to tax
the HTT and many have introduced presumptive taxes targeting informal businesses. It is
therefore no longer a question of ‘if’ but a question of ‘how’; how can they tax these businesses
more effectively than they currently are.
It is also important to remember that despite the fact that there is some terminology
confusion in this field with some authors viewing all informal sector players as ‘poor’, ‘street
hawkers’ or lowly paid informal workers, the boundaries of this study have been carefully
chosen and defined; the term HTT has been shown to be more helpful as it includes groups
such as professionals who are not traditionally viewed as ‘informal’ yet they present significant
challenges for revenue collectors. Therefore, while it is acknowledged that some groups must
be left out of the tax net for equity and efficiency reasons, it has also been shown that lumping
different sectors and terming them ‘informal’ is not helpful in taking the discussion forward;
the term HTT encompasses more difficult to tax groups and even that term needs to be
unpacked as the groups comprising the HTT are difficult to tax for different reasons and would
require different interventions.
In addition, once the term HTT is unpacked and it becomes clear that informality is not
always as a result of poverty and may be a choice or may be the norm in a particular sector,
arguments around equity in taxation begin to emerge. One of the main arguments for the
taxation of the HTT is that it is unequitable for certain groups within the economy such as the
employed whose income is subject to PAYE to carry a significant portion of the tax burden
while other groups evade tax because the revenue authority has taken the position that they
would be too hard to tax. On top of the fact that it introduces unfairness into the tax system, it
also does significant damage to the tax morale of faithful tax payers and may encourage them
to either move out into more informal work or begin earning a separate undeclared income
from some informal work.
Further, the indirect benefits of taxing the informal sector (and it is argued that these
indirect benefits extend to the taxation of the HTT in general), also provide compelling reasons
for taxing the sectors. Perhaps one of the most important indirect benefits is that it has the
potential to increase the citizenry’s level of engagement in governance matters. ‘Governance’
and ‘democracy’ are fashionable terms in the fields of politics and development at the moment,
particularly in as far as they apply to the growth of developing countries. It would seem to be
a wise choice to promote any effort that would serve to enhance the dialogue and bargaining
space between citizens and the state in developing countries, and developed ones as well
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