Tax Law: Anti-Template and Laboratory for Formal Business Law in the Informal Sector

Abstract

A substantial majority of non-agricultural workers in a developing country such as Cameroon engage in legal businesses below the governmental radar, that is, in the informal sector. Because the financial crisis has expanded the informal sector in the global North, developing economies’ experience with that sector is of world-wide relevance. A pilot study in five Cameroonian markets is thus of general interest when it reveals that entrepreneurs there do not benefit from formal business laws, which in turn limits their ability to borrow and their willingness to lend. Formal business laws do exist in the formal sector; however, trying to move informal-sector workers to the formal sector where these laws already offer some protection can disrupt the entrepreneurs’ ability to sustain themselves, and to contribute to the national economy. As to bringing the formal business laws to the workers in the informal sector: the one formal law that the interviewees appeared to experience was tax law. The interviewees described a government using power to extract payments, instead of deploying strategies of respectful reciprocity and providing public goods which, according to the tax-morale literature, would encourage compliance. The experience of Cameroon’s informal sector with formal tax law is thus not an appropriate template for introducing formal business laws into that sector. The pro-business strategy is, instead, to apply tax-morale learning to reinforcing formal business laws. For informal-sector businesses wherever located, the strategy calls for government authorities that are respectful, and focused on building basic infrastructure.