Informal sector is useless doesn't reduce poverty or increase productivity

[KenyanPlato]

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GOk should find a way of killing it and bringing more people to formal sector. Let me hear what you think

[hk]

GOk should find a way of killing it and bringing more people to formal sector. Let me hear what you think

The question is how come the informal sector is eating formal sector lunch? How come formal sector can't drive a low productivity sector out  of business? Hell even the formal sector is becoming informal, banking , agency banking. And many more sectors.  There's little benefit to being formal when one is being taxed to death.  The solution is changing of taxation and predictability of taxation. It should not be that every time a new budget is read the private sector has to embrace themselves to increased taxation.

[KenyanPlato]

Yes HK..it is the policy stupid ideas that force formal to be unable to compete

I will link an arcticle on this .the perspective was on micro credit destruction of capital and promotion of informal instead of formal

[RV Pundit]

The solution is to formalize informal sector..for example ensure every juakali man is registered with nhif,nssf, has a pin, file tax returns, save & borrow money in a bank.This is start to happen Kenya.. because it doesn't pay to be informal.Nobody should be informal thanks to digital technological revolution.The likes of Uber are formalizing taxis.Mobile money formalizing banking.Many sectors are now formalizing.The problem with taxation is that a few are shouldering the burden of many.Most in informal sector outside agricultural activities earn more than formal sector with same education level...but the don't pay taxes...leaving tiny private sector and formal sector to shoulder huge burden.Gov has to formalize everyone...and if everyone paid their taxes...the burden will be lessen...gov will have a lot more money to fix infrastructure deficit and spend in critical social sectors...and economy can grow

[KenyanPlato]

The solution is to formalize informal sector..for example ensure every juakali man is registered with nhif,nssf, has a pin, file tax returns, save & borrow money in a bank.This is start to happen Kenya.. because it doesn't pay to be informal.Nobody should be informal thanks to digital technological revolution.The likes of Uber are formalizing taxis.Mobile money formalizing banking.Many sectors are now formalizing.The problem with taxation is that a few are shouldering the burden of many.Most in informal sector outside agricultural activities earn more than formal sector with same education level...but the don't pay taxes...leaving tiny private sector and formal sector to shoulder huge burden.Gov has to formalize everyone...and if everyone paid their taxes...the burden will be lessen...gov will have a lot more money to fix infrastructure deficit and spend in critical social sectors...and economy can grow

The government won't willingfullly do this because this is the place to park the little monster called unemployment

Anyway he is the article

https://africasacountry.com/2019/09/a-fatal-embrace

[Nefertiti]

BAN CASH and tax the digital transactions. That way big spenders will obviously pay more. Transaction and VAT is a fairer, wider unbeatable tax than PAYE and corporate which doesn't net the infotmals. Assume for instance you can't pay rent by cash - the transaction is taxed automatically. It also nails the landlord. KRA can cap bench transactions say 250/- max per day per person. A few mahindi choma, shoeshine, mkokoteni or jugu karanga folks will suffer but the adjustment is a greater good.

[RV Pundit]

BAN CASH and tax the digital transactions. That way big spenders will obviously pay more. Transaction and VAT is a fairer, wider unbeatable tax than PAYE and corporate which doesn't net the infotmals. Assume for instance you can't pay rent by cash - the transaction is taxed automatically. It also nails the landlord. KRA can cap bench transactions say 250/- max per day per person. A few mahindi choma, shoeshine, mkokoteni or jugu karanga folks will suffer but the adjustment is a greater good.

Yes this ought to be done now...remove the big currencies and encourage more people to pay digitally...that way you can capture more informal economy and formalize it.

[hk]

So the sole purpose of formalizing is for the government to tax the informal sector? The informal sector should be given incentives to formalize. Take jua kali people, how come there's no company with the relevant scale to make those goods at a cheaper and better quality? Finally I have a problem with government mandates and bans, the options should be there for people to use whatever form payment they like. Unless the deficiencies in the formal sector aren't addressed, the informal sector will continue to grow.

[RV Pundit]

The tax burden for everyone will be lower when everyone is paying their taxes. I recently read that of nearly 0.5M registered companies - only 8% - about 40,000 were paying taxes - the rest don't pay. What we have in Mpesa/Mobile money is godsend. Gov has to take advantage to ensure all black economy is mainstreamed. Including drastic actions such as banning cash transactions...because we know anybody who prefer cash now...is probably upto no good...a corrupt or tax cheat or drug dealer. M-pesa is so convenient for everyone.

If you go to say a bar - most people drinking from day 1 to day 30 every month - are Juakali people -while salaried folks are over-tax - a typical juakali person or boda boda person can easily make 1-2k per day - tax free. Even matatu touts probably make 5k. That black money is not efficiently used and captured...and gov loses...and the informal person also loses.

So the sole purpose of formalizing is for the government to tax the informal sector? The informal sector should be given incentives to formalize. Take jua kali people, how come there's no company with the relevant scale to make those goods at a cheaper and better quality? Finally I have a problem with government mandates and bans, the options should be there for people to use whatever form payment they like. Unless the deficiencies in the formal sector aren't addressed, the informal sector will continue to grow.

[hk]

The tax burden for everyone will be lower when everyone is paying their taxes. I recently read that of nearly 0.5M registered companies - only 8% - about 40,000 were paying taxes - the rest don't pay. What we have in Mpesa/Mobile money is godsend. Gov has to take advantage to ensure all black economy is mainstreamed. Including drastic actions such as banning cash transactions...because we know anybody who prefer cash now...is probably upto no good...a corrupt or tax cheat or drug dealer. M-pesa is so convenient for everyone.

If you go to say a bar - most people drinking from day 1 to day 30 every month - are Juakali people -while salaried folks are over-tax - a typical juakali person or boda boda person can easily make 1-2k per day - tax free. Even matatu touts probably make 5k. That black money is not efficiently used and captured...and gov loses...and the informal person also loses.

So the sole purpose of formalizing is for the government to tax the informal sector? The informal sector should be given incentives to formalize. Take jua kali people, how come there's no company with the relevant scale to make those goods at a cheaper and better quality? Finally I have a problem with government mandates and bans, the options should be there for people to use whatever form payment they like. Unless the deficiencies in the formal sector aren't addressed, the informal sector will continue to grow.

You need to give juakali people incentive to formalize. You do that by lowering the taxation of the formal sector. Then enforce tax collection. This what has worked for landlord taxation when it was reduced to 10% of gross.

[RV Pundit]

Tax obligation are not a favour that requires incentives to be dolled out - they are mandatory. Once KRA has your money trail - they can come for you. So if they can see MPESA transactions - Juakali people can be robbed. Parliament can listen to cries of each sector and decide appropriate measures. But KRA first must rope in everyone  and this they can only do if Treasury & CBK - demonetize the economy.

You need to give juakali people incentive to formalize. You do that by lowering the taxation of the formal sector. Then enforce tax collection. This what has worked for landlord taxation when it was reduced to 10% of gross.

[hk]

Tax obligation are not a favour that requires incentives to be dolled out - they are mandatory. Once KRA has your money trail - they can come for you. So if they can see MPESA transactions - Juakali people can be robbed. Parliament can listen to cries of each sector and decide appropriate measures. But KRA first must rope in everyone  and this they can only do if Treasury & CBK - demonetize the economy.

You need to give juakali people incentive to formalize. You do that by lowering the taxation of the formal sector. Then enforce tax collection. This what has worked for landlord taxation when it was reduced to 10% of gross.

Informal sector pays taxes, its just that they don't necessarily pay all of them. The reason why our VAT is so high is so that to capture  informal sector. The excise duty on money transfer and even in consumable goods is to capture informal sector. The reason why there's informal sector is cause of those obligations. World over the way to reduce informal sector is to lower and broaden taxation . 

[RV Pundit]

You broaden first - by roping in everyone - then you can lower the tax. You do that by forcing informal sector to formalize. For example Matatus are informal - and yet we are talking billions in the sector. How do we get them to pay taxes....when they deal almost exclusively on cash basis.

World over the way to reduce informal sector is to lower and broaden taxation . 

[hk]

You broaden first - by roping in everyone - then you can lower the tax. You do that by forcing informal sector to formalize. For example Matatus are informal - and yet we are talking billions in the sector. How do we get them to pay taxes....when they deal almost exclusively on cash basis.

World over the way to reduce informal sector is to lower and broaden taxation . 

Lower then broaden. Brute force with heavy taxation leads to black market(unintended consequences). Creating a low flat tax would go along way in lowering and broadening the tax base. Matatus pay tax via their saccos, actually going by how much they pay even local authorities, NTSA, fuel levy etc they're heavily taxed. Ever wondered how come most matatu's owners are barely breaking even?

[RV Pundit]

I don't think if tax was 10bob as opposed to 100bob people will willingly pay. KRA has to just force people to pay. Yes Matatus do pay a lot of what goes for A-I-A (appropriation in aid) - but in other countries like Rwanda and even Uganda - you have to pay tax if you have PSV.

Lower then broaden. Brute force with heavy taxation leads to black market(unintended consequences). Creating a low flat tax would go along way in lowering and broadening the tax base. Matatus pay tax via their saccos, actually going by how much they pay even local authorities, NTSA, fuel levy etc they're heavily taxed. Ever wondered how come most matatu's owners are barely breaking even?

[MOON Ki]

GOk should find a way of killing it and bringing more people to formal sector. Let me hear what you think

GoK has totally failed in formal-sector employment area---public-sector jobs and, more importantly, creating an environment for formal private-sector employment to flourish---so how is it going to do what you propose, especially when it prefers to simply boast of "how many jobs the economy created".   Last year the economy supposedly created around 830,000 jobs.   The government seems quite pleased with that and is talking about the millions more to come.   But around 760,000 of those were in the informal sector.    And the ratio has been like that for quite some time.   

[RV Pundit]

The only informal jobs we need to worry about are those in agriculture sector. Otherwise I have seen studies that shows informal jobs earn as much if not more than formal jobs of same educational requirement. We need to shift kenyans from being farmers to become cobblers, tailors, ec. This is where TIVET comes in. There is big push now...but we need to copy the german models and ensure at least 1M kenyans are enrolled in TIVET annually....so we can have future cobblers, tailors, hair dressers...not farmers or herders.

And if not we have to find how farmers can become more productive...so they can earn more income.

GoK has totally failed in formal-sector employment area---public-sector jobs and, more importantly, creating an environment for formal private-sector employment to flourish---so how is it going to do what you propose, especially when it prefers to simply boast of "how many jobs the economy created".   Last year the economy supposedly created around 830,000 jobs.   The government seems quite pleased with that and is talking about the millions more to come.   But around 760,000 of those were in the informal sector.    And the ratio has been like that for quite some time.   

[MOON Ki]

Lower then broaden. Brute force with heavy taxation leads to black market(unintended consequences). Creating a low flat tax would go along way in lowering and broadening the tax base.

Exactly.   Finding clever ways to tax the poor will not lead to national economic transformation.   Much better to give them a break, help them lift themselves up, and then get into their pockets.   

The other thing is the small matter of what happens with the people's hard-earned.   The endless "eating"---people simply carrying out gunias of cash from bank basements, etc.---need not be brought up again.  Instead we can consider the provision of services: public hospitals are filthy, poorly-equipped, ... the last places for a sick person; the education system is a cycle of jokes, punctuated with gimmicks like laptops-for-all-toddlers; the police are a menace to law-abiding citizens; most of the roads are death-traps; one part of the judiciary has been cowed, and the other part is still for sale; etc, etc., etc.    If people must be taxed with such zeal, at the very least try to convince them that it's worth it!

[MOON Ki]

The only informal jobs we need to worry about are those in agriculture sector. Otherwise I have seen studies that shows informal jobs earn as much if not more than formal jobs of same educational requirement. We need to shift kenyans from being farmers to become cobblers, tailors, ec. This is where TIVET comes in. There is big push now...but we need to copy the german models and ensure at least 1M kenyans are enrolled in TIVET annually....so we can have future cobblers, tailors, hair dressers...not farmers or herders.

And if not we have to find how farmers can become more productive...so they can earn more income.

That is a very broad claim.   I would have to see some of those studies if I am to believe it.   Perhaps you will post them soon.   At which point I will promptly rush back to Kenya and start raking it in, in the informal sector.   

I am prepared to believe that there are those, i.e. some,  in the informal sector who earn more than those in the formal sector ... etc., etc.., etc.   I could see that even when I was a kid ages ago: our local,  uneducated charcoal dealer who made tons, because he produced really good charcoal and charged accordingly.   But we did not, on that account, promote or consider charcoal-making as the career path for all to jump onto.  Yours is a very broad, blanket claim.   

The problem now is that have too  many "universities"  churning out all sorts of B.A.s and what-nots that are, "educational level" notwithstanding, barely educated and not capable of much real contribution to the economy.   Because of that, I agree with we could  do with more  more of what we used to call "polytechnic education" or whatever.

Cobblers and tailors, eh?    Presumably to get enough customers they would need to be in an urban or semi-urban area, with higher costs of living than in rural areas?   And keeping in mind that these are not the purveyors of bespoke products that you find in the West etc. .... I don't know where you live in Kenya, but in the places that I am familiar with cobblers and tailors don't seem to be doing much better than when I was a kid there.   

To my mind, what Kenya needs is to get serious about manufacturing.   Give up on the grand and random plans of "to be x% of gdp by year y" sort of thing and actually do something.   Otherwise, the destination of the products of the "german model" will be banging out sufurias and jiikos from scrap metal, near the bus-stand.  Big Push = Big Talk.   

[RV Pundit]

As I look for that study on wages...read this excerpts...farmers earn 14-40usd per month - while those in juakali in urban centers earn upto 5 times.

"As demonstrated in this study, although land is an important asset especially in an agriculturally productive setting, the monthly earnings can be quite low for most rural subsistence farmers, averaging about 40 USD but as low as 14 USD. On the other hand, urban nonagricultural informal enterprises are financially better off, with monthly expenditure averaging about 236 USD. Studies in Kenya noted very similar results; that is, earnings of up to 206 USD and 250 USD per month in the nonagricultural informal sector, respectively."

Let me give an example of informal transport sector--Boda Boda - According to the Motorcycle Assemblers Association of Kenya (MAAK), there are about 600,000 commercial motorcycles currently operating in Kenya, each earning an average of Sh1,000 a day which translates to an annual turnover of Sh219 billion. Boda boda typical earn more than you average teacher or police-man or nurse - if only banks had such info - they would be able to borrow half a million - to - a million shs like a teacher - buy himself land or a house.I know boda boada in "mavoko" who now owns taxis/pickups and the works. These are kind of folks we need to formalize...make sure they have NHIF, NSSF, bank account and we have their data. It wll benefit them and it will also benefit gov eventually.

The second  example - informal construction sector - all the fundis and watu wa mjengo - on average daily rate start from 500-1,000 per day - even assuming they half the time everyth month - they are better off than some formal manufacturing jobs.

That is a very broad claim.   I would have to see some of those studies if I am to believe it.   Perhaps you will post them soon.   At which point I will promptly rush back to Kenya and start raking it in, in the informal sector.   

I am prepared to believe that there are those, i.e. some,  in the informal sector who earn more than those in the formal sector ... etc., etc.., etc.   I could see that even when I was a kid ages ago: our local,  uneducated charcoal dealer who made tons, because he produced really good charcoal and charged accordingly.   But we did not, on that account, promote or consider charcoal-making as the career path for all to jump onto.  Yours is a very broad, blanket claim.   

The problem now is that have too  many "universities"  churning out all sorts of B.A.s and what-nots that are, "educational level" notwithstanding, barely educated and not capable of much real contribution to the economy.   Because of that, I agree with we could  do with more  more of what we used to call "polytechnic education" or whatever.

Cobblers and tailors, eh?    Presumably to get enough customers they would need to be in an urban or semi-urban area, with higher costs of living than in rural areas?   And keeping in mind that these are not the purveyors of bespoke products that you find in the West etc. .... I don't know where you live in Kenya, but in the places that I am familiar with cobblers and tailors don't seem to be doing much better than when I was a kid there.   

To my mind, what Kenya needs is to get serious about manufacturing.   Give up on the grand and random plans of "to be x% of gdp by year y" sort of thing and actually do something.   Otherwise, the destination of the products of the "german model" will be banging out sufurias and jiikos from scrap metal, near the bus-stand.  Big Push = Big Talk.