“Governments in developing countries tend to overtax individuals in formal employment”. Using suitable explain why Governments find it convenient to continually raise higher taxes on earnings from formal employment.

Formal employment has the following characteristics that make it convenient to raise taxes:

  • Income in formal employment is certain since those in employment are expected to be in work over a long period of time before retirement.
  • Collection of such tax is less costly since employers are agents to the Government who charge, collect and remit tax to the state without payment.
  • Elasticity of demand for income in formal employment is inelastic in face of rise in tax since incomes informal employment tends to be higher than would be the case in informal sector.
  • It is not easy to evade taxes on formal employment.
  • The tax authority does not have sufficient capacity to enforce/collect tax from informal sectors.

 

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