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A Case For Tax Evasion In The Informal Economy

Without under-the-table, off-the-books dealing, argues Benedict Dellot, many businesses would simply not exist. He calls the informal economy a "hotbed of entrepreneurialism."

Benedict Dellot is a Senior Researcher for the Royal Society of Arts, the London-based multidisciplinary institution. Dellot has taken an interest in the informal economy—the legions of workers who don’t declare their income to the tax authorities. As he and colleagues argue in a recent paper, the informal economy isn’t just for shady figures looking to squeeze out as much profit as possible; in large measure, it’s inhabited by entrepreneurs whose fledgling businesses might simply fail if they played strictly by the rules.

FAST COMPANY: "Informal economy" evokes a lot of things. Can you define it?

BENEDICT DELLOT: For our study, we focused on people who did work off the books, but we didn’t include illegal activities such as prostitution and counterfeiting.

How much of an overall economy is off-the-books work?

Estimates vary wildly. In the UK, official estimates put it around 1.5% of the GDP. Certain economists say it could be as much as 10%, or in the UK, two billion pounds per year. In developing countries the estimates are huge, sometimes about 90%.

Far from being a refuge for mere crooks, you actually call the informal economy a "hotbed of entrepreneurialism."

Traditionally in the UK, the informal economy is seen as a problem. It reportedly makes the tax base unstable. It creates unfair competition, goes the argument, against businesses that are being fully compliant. It arguably creates vulnerabilities for informal workers themselves, since they’re unlikely to save for their pensions. There’s an idea that this is just for the needy and the greedy.

We looked at the issue. We polled 600 small business owners and asked them about their experience with and attitude toward the informal economy. What we found is that when people first launch a business, they often engage in informal work. One in five respondents had engaged in informal work at one point. One of the most popular reasons was because it gave entrepreneurs breathing space before they had the capacity to register. Only 9% said they took informal work to earn extra income. It’s not about greed—it’s a stepping stone, really, towards fully fledged entrepreneurship. The informal economy is possibly an incubation space for the growth of fuller enterprises.

So the idea is that if we clamped down 100% of people in the informal economy, we’d actually be stifling economic growth, job creation, and so on?

We have a simple, rosy picture of how people set up their businesses. They get an idea, write a business plan, go to a bank, get a loan, start their business, pay their taxes. That rarely holds true. Increasingly people are using new platforms, like eBay and Etsy, that just allow people to sell stuff immediately. They’re selling stuff before they even have a chance to write a business proposal. We have to recognize that there are new patterns of business creation aided by disruptive technologies, allowing people to create businesses from nowhere very quickly, and that also make them far more likely to engage in informal work.

What do you advocate?

A stepping-stone model helping entrepreneurs make their journey from informality to formality, helping them to become aware of their obligations and to do simple things like set up bank accounts, register for income tax, and so on. In the UK we have work programs that help informal workers register their businesses.

The problem is, at the moment, if you’re an informal worker and you drop in to talk to an advisor and say you haven’t been declaring your income the last six months, that advisor is currently obliged to disclose that to somebody else, and the government then clamps down on that individual. We want to see a bit of leeway there, with no duty to disclose. The problem with all this is it’s really politically unpalatable. Politicians want to be seen as strong and punitive in the way they deal with informal workers. We need politicians to have a bit of courage to get involved in this debate.

Do we also need courage on the part of entrepreneurs who became successful, but feel they wouldn’t have had they played strictly by the rules in the early days?

The typical image we have of the entrepreneur is someone who has great ideas, drive, and energy. In fact there are plenty of people who made it out of hard struggle, and part of it involved not paying their taxes. I think we do need more entrepreneurs being honest about how they got where they are. They should say, "Let’s appreciate the fact that some people have to work in the informal sphere. I did, and it enabled me to get where I am."

The problem is, there’s not a lot of people who want to identify themselves as having done that, because they’re seen as cheating the system. If Richard Branson or Michael Bloomberg were to say, "I actually started my business off the books," people would say, "Oh, you cheated your way there." They would lose the grand standing they currently enjoy—when in reality, people should flip that on its head and say, they got there because they were able to work informally.

This interview has been condensed and edited. For more from the Fast Talk interview series, click here. Know someone who'd be a good Fast Talk subject? Mention it to David Zax.

[Image: Flickr user jmrosenfeld]

Add New Comment


  • TabCatter

    Well, a few Brits may still use the word "entrepreneurialism," but the rest of the world simply calls it "entrepreneurship."  Doesn't mean Fast Company can't edit for language...

  • Thomas McDonagh.

    Excellent point.What good is capitalism and how good are laws if they keep people in strait- jackets.People must have the freedom to experiment, to try,then as the venture begins to strengthen,the business learns the proper way to do things and pays its share.
    When you put roadblocks in front of ingenuity,the system is defeating itself.

  • Sanbornstrees

    I've called it the gray market for many years now. Most people operating in it put anything they earn right back into the local economy; therefore, they are paying a significant percentage of tax already. Here in MKE/WI that comes to near to 6% in sales tax, then there is property tax, whether they own or rent.

    Then there is the type of client they usually deal with, fixed income pensioners or fellow low income labor class, playing by the rules often puts the cost of service out of their reach.

    I'm in tree care ( Arboriculture), most operators who start out that way become legitimate out of practicality, you need insurance and a tax number to get certain contracts; having workers comp protects you from astronomical costs related to health care...

  • johncoryat

    I started out running my business "informally" too. In the beginning, it was hit or miss as to if I could pay my bills. If I had paid all the "formal" expenses, I wouldn't have been able to make it. Now, I'm making a mid-six figure annual income and pay a lot of taxes and other "formal" expenses. The amount I pay each year now far exceed the total I didn't pay 25 years ago when I was starting out.

    Not only do I pay a huge amount of taxes but I also created actual, high paying jobs in the process. It was a win-win for everyone, including the government.

    Now if only I could pay a 15% Mitt Romney tax rate, I would be super happy.

  • Manlyart

    According to a personal survey of local accountants, about 30% of Lancaster County, PA's economy is "off the books."