Lastly, they agree with Williams and Nadin (2012) that there should be commitment to introduce tax education and awareness campaigns about the benefits of formality and redistributive justice where the services provided should be commensurate with tax paid adding that tax authorities should also treat entrepreneurs in a responsible, respectful and impartial manner.
Table 2.3: Policy approaches taken by governments
Approach Method Measures (Examples)
1 Deterrence (Pursue and punish)
Improved detection
- Data matching and sharing - Joined up strategy
- Joint operations Increased
penalties
- Increased penalties for evasion
Increased
perception of risk
- Awareness on penalties for informal work
- Awareness of the effectiveness of detection procedures
2 Enabling compliance
Prevention (Prevent entry)
- Simplifying procedures
- Direct and indirect tax procedures - Smooth transition to self-
employment
- Micro-enterprise development Curative
(Encourage exit)
- Provision of demand side incentives e.g. targeted indirect tax
- Provision of supply side incentives e.g. amnesties
Fostering commitment
- Promoting benefits of formal work - Awareness campaigns
- Peer to peer surveillance - Tax fairness
- Procedural justice - Redistributive justice Source: Williams (2009)
1. The Bulgarian experience saw the introduction of preventive and curative measures that foster commitment in tackling the informal economy. They introduced mandatory registration of labour contracts and minimum insurance thresholds coupled with
restriction of cash transactions in a bid to tighten control of tax payers and also introduced a special web site to facilitate discussion and surveillance amongst peers (Dzhekova
&Williams, 2014).
The government opted for repressive measures in light of shrinking national budget. A mandatory real time link between fiscal devices and servers of revenue authorities together with special control devices linked to monitor the movement of excise goods were introduced. Williams further acknowledges that these measures were followed by intensive inspection campaigns which culminated into temporary compliance. This policy option however did not yield the desired results as it failed to change attitudes and foster voluntary compliance by informal entrepreneurs (Dzhekova &Williams, 2014).
The Bulgarian government also adopted preventive measures by putting in place an Act aimed at clarifying and simplifying administrative regulations and reducing administrative control (ibid). This policy option has been limited in that it lacked transparency and was vulnerable to authority manipulation. Deterring entry into the informal sector has been pursued through mandatory registration of work contracts and mandatory minimum incomes. The measure resulted in limited work without contract further pushing small businesses to employ part time workers.
Curative measures included the introduction of flat tax on personal incomes, food voucher system for private sector employees in a bid to boost employee’s non-taxable incomes. Public campaigns aimed at raising awareness and fostering commitment has been carried out by social partners. The holistic nature of this approach has ensured sustainability in dealing with the informal economy.
2. Ishengoma gives practical initiatives from government perspective and donor agencies by highlighting how the Chinese and the South African governments have tackled informality and how donor agencies such as Swedish International Development Agency have brought the third option.
To speed up the registration process and assist informal entrepreneurs in China, she claims that special administrative committees were established at different levels such as district, city and streets in order to provide seal of approval for formation and registration of businesses as well as assisting in setting up bank accounts, receipting and data gathering for higher authority (Ishengoma & Kappel, 2006). The committees also offer technical assistance, training and advice on setting up a business. They facilitate deals
between informal contractors and their clients and act as guarantor for bank loans. In Shangai the initiative however resulted in a paltry 25% of informal businesses complying with formalisation, a figure which is believed to be below average (ibid).
3. In order to create an enabling environment to formalisation in South Africa, the strategy is that of equalisation of income, wealth and economic opportunities, creation of long term jobs, levelling the playing field between big and small players and promoting SME’s competitiveness (Ishengoma & Kappel, 2006). The department of labour offers productivity training and facilitates linkages through in sourcing. Training is offered through linking SMEs with students on industrial attachment. The department of labour is also said to conduct workshops on productivity awareness, creation of new markets and training of owners and their employees. This initiative is however more of preventative measure than it is curative. Instead of creating an enabling environment to formalisation, the initiative has only managed to save jobs of retrenched workers through community based projects.
4. Literature shows that the United Kingdom has adopted deterrence measures as their preferred policy response to informality and yet it has not been as effective as the policies which aim at enabling compliance (Barbour & Llanes, 2013). The government implemented punitive policies that sought to deter informal business. This has however not resulted in the intended reduction of the informal activities but instead increased (European Commission, 2007).
5. SIDA, a donor agency has introduced programs focused on micro financing, infrastructure development, enhancing market access, awareness and education through the media. In Nicaragua SIDA offered grants to those registered for infrastructure development, offered credits and housing loans which have enabled businesses to strengthen and develop economically (Ishengoma & Kappel, 2006).
6. In Uganda, SIDA with the cooperation of ILO introduced radio programs and media publications targeting SMEs. The programs offered marketing information, public awareness and education on the need to go formal. The program has been considered a success as it has helped solve conflicts and has reached out to over two thirds of Uganda’s poorest informal businesses (Hitchins et al, 2004 in Ishengoma & Kappel, 2006).
7. In Tanzania, Nelson and De Bruijn (2005) found out that some enterprises have formalised after being stimulated by institutional incentives, opportunity costs and