“The extent of unreported and unrecorded economic activity is cause for concern in any modern economy. This is because the extent to which individuals and firms engage in activities that are hidden from authorities is symptomatic of serious incentive problems such as large tax, bureaucratic, and regulatory burdens. In addition, activities in the informal sector can negatively impact the efficiency and functioning of the formal sector. For any policy to be truly evidence based, it must consider its impact on all markets, including those that largely contain unregistered actors. Thus, obtaining accurate measures of the allocation of a country’s resources in the shadow economy is important for effective economic policy decisions (Schneider, Buehn, and Montenegro, 2010).”
This is taken from a 2017 IDB report “Estimating the Size of the Informal Economy in Caribbean States” by Amos Peters who defines the legal and illegal shadow economy as that which would “include all economic activity that would generally be taxable if it were reported to the tax authorities.”
If one thinks on one’s own daily life and from whom you buy goods and services – the fruit vendor, the taxi driver, the plumber – most, if not all, are probably operating outside of the tax system either completely or partially. So running alongside our formal or official economy is a shadow one. Estimating its size can be difficult obviously since it is in the shadows. But when one ponders the extent of illegal gold trading and indeed drug transactions that by their very nature must remain informal, it must be substantial.
The report tries to gauge this by measuring the demand for electricity and currency in relation to GDP using a method best left to economists. Anyway the estimate is that Guyana’s informal economy was about 29–33% of GDP. That is quite substantial and higher than many Caribbean economies except Suriname.
One of the problems of having a shadow economy is that there is little understanding of how it operates and this handicaps policy makers from understanding the performance of the overall economy, outside of anecdotes, and in gauging the effects of policies.
For example, we know very little about the fishing industry. So how can we devise policies to develop the sector? All we have are narratives. In 2022 the fishermen were crying out for a cash grant since there were no fish. But then this year we hear there are too many fish in the sea! One fisherman complained that, “Fish price drop, we get large catch since starting the year and price went down.”
Similarly since very few small shopkeepers are registered for tax, the government has little information on the effect of its various grants it has been handing out in rural and hinterland areas. Where did that money go? New school uniforms, food supplies, household items or on entertainment as some might allege? Similarly one of the arguments on keeping public sector wage increases low is that they can cause inflation as vendors raise prices. There really is no definitive data on this other than some macroeconomic numbers that suggest otherwise.
So gathering as many individuals under the tax umbrella would have tremendous benefits to policy makers. And as the report states “Measurement of informal sector activity is the foundation upon which
policymakers can begin to understand and determine the optimal tax burden.”
But it also can work for the micro-entrepreneur as well. The small man who packages his plantain chips in his bottom house and does a roaring business around town is afraid to even put a label on his product for fear the tax man might find him out. All his transactions are strictly cash with an unmarked bill book. The taxi driver who might want to start a fleet and service the oil sector might think twice if it means he needs to reveal his income. Living like an economic fugitive restricts you from growing your business.
And ultimately it is a matter of fairness. Workers who have their income taxed at source continue to bear the burden of funding the governance of this country be it for our healthcare, our elderly, our roads that we all drive upon, our fire service (think Corriverton) and most pertinently right now, our army.
Meanwhile revenue from self-employed persons filing taxes in 2021 was just $4B with only a quarter of those registered filing. This was actually lower than in 2020 even with our booming economy.
PAYE Returns from employed workers were $42B exceeding corporate tax returns which were $37.5B with only 2,404 companies out of 10,026 filing returns although the GRA noted that the TRIPS Database is also bloated. Meanwhile the number of lawyers and doctors registered for Tax Practice certificates as published in the Gazette seems low compared to those known to be actually practising.
Over the decades there has not been much effort to get the informal economy formalised and there are no doubt political factors involved in this lack of resolve. However this is an opportune moment to get our house in order. The amount of revenues pouring into the treasury from oil receipts is beyond the spending of any government. Next year the estimate is of some US$2.4B or G$490B, if oil prices hold around US$80 per barrel. Despite its best efforts, the administration does not have the capacity to spend that amount on infrastructure. In fact one sees with the delays in many of the large projects that the capacity is not there. We are also seeing price increases for some of the most basic foodstuffs – pumpkin and tomatoes are now luxury items and one fears for prices in the run up to Christmas. At some point the government will be compelled to institute a more formal programme that addresses Guyana’s persistently high poverty rate.
This would need to be done through the registration of all income earners and thus requires their incorporation into the tax system. This should then lead to the requirement of an annual tax return before any support is provided. This would not be popular of course however it could be made more palatable by an amnesty on the self-employed and a much higher minimum tax threshold so in effect many would pay nothing, or some nominal almost symbolic amount.
It may sound self-righteous but paying taxes is a duty to the nation and probably more consequential than voting every five years. No country can survive without taxes and they have the social effect of investing citizens in the welfare of their country and their fellow citizens. Aside from the monetary value, taxes are the glue that keeps the social compact strong. The question is whether our leaders and indeed the people believe strongly enough that this matters.
