Author(s) :

Yash Nair.

Volume/Issue :

Abstract :

This paper examines the relationship between tax collection, GDP growth, and the informal economy, addressing the question of how limiting informal activity and maximising tax collection can boost GDP growth in a country. The paper first reviews existing literature to point out established economic theories and recognise real-world examples that link informal activity, GDP growth and the efficiency of tax collection. Secondly, a quantitative analysis was performed using the variables of average tax revenue as a percentage of GDP, mean annual GDP per cent growth and average informal employment as a percentage of total employment. This relationship between variables is examined using a variate regression model and a correlation matrix, which aid in examining the exact measure of the relationship among the chosen variables. The results from the data analysis present a strong positive relationship between average tax revenue as a percentage of GDP and mean annual GDP per cent growth, additionally presenting a strong negative correlation between average tax revenue as a percentage of GDP and average informal employment as a percentage of total employment. These findings suggest that weak and inefficient tax collection can discourage formal economic participation and limit long-term growth. Based on the findings, policy changes that make the tax system simpler, proper and strong enforcement mechanisms and administrative capacity building are all recommended to potentially enable economic growth, maximise tax revenue while simultaneously suppressing the reliance on informal activity. This paper acknowledges limitations in the consistency and reliability of the data on informal activity, which may affect the robustness of the data.