Tax Revenue and the informal sector in developing countries: the case of Côte d’Ivoire

Abstract

The informal sector is characterized by limited relations with the tax authorities, which reduces the tax base. As a result, governments are forced to resort to other sources of financing, including public debt policy. This study provides an opportunity to analyze the relationship between the development of informal activities, changes in the general price level, and tax revenues in the case of Côte d’Ivoire. To this end, we empirically address this issue with the help of a linear econometric time series model over the period 1987-2020, using cointegration techniques. On the basis of the prediction of the linear model, the empirical results reveal that the Ivorian state would be rational if the policy of financing the economy were based on increasing the general price level to the detriment of taxes because of the extent of the development of informal activities. In addition, the Ganger causality test shows two significant unidirectional causalities. One from the informal sector to tax revenues and the other from price increases to tax revenues.

Keywords

• informal sector
• côte d’ivoire
• tax revenues
• cointegration