The parable of the lost coin: A letter to the taxman

Nixon S. Chekenya

IN ecclesiastical practice, the parable of the lost coin is not very famous.

On this occasion, it seems right to reflect on it.

Teachers of theology often consider money as one of the main themes of the Bible.

Here, I adapt the parable of the lost coin to clarify the notion of informal sector formalisation and taxation and to concretise the link between informal sector and revenue potential.

The economics of informal sector formalisation and taxation is sophisticated, but the concepts themselves are simple enough to allow their introduction in a bid to persuade policymakers to re-think formalisation and taxation of the informal sector.

The link between informal sector formalisation and taxation arises naturally from the ecclesiastical parable of the lost coin.

The parable of the lost coin is a fitting example of how wealth can be lost and traced back.

Remember the main point of the story, “how would you respond if you discovered you had lost a silver coin?”

Isn’t it that the woman searched until she found it?

The difference between losing a coin and a sheep is that the coin doesn’t do the wandering off.

The woman set out to find the coin. She lit a lamp, swept the house and looked for it diligently.

She did not stop until she found it. The woman rejoiced with her friends when she found it. It’s a good story!

We all understand the joy experienced in finding lost wealth.

In a general way, the story illustrates how wealth can be lost and traced back again, with more joy this time.

But what if the woman had lost six coins out of 10? How much diligence would she employ? This would mean that the woman, I assume, would more than double her efforts to regain her lost wealth.

To understand the phrase “formalisation and taxation”, we should first define informal sector activities.

Informal sector covers all currently unregistered economic activities that contribute to the observed gross domestic product (GDP).

One key characteristic of informal sector activities is that they are unregistered, hence the taxman does not know them.

Taxing the informal sector in Zimbabwe is possible but we have to take some factors into consideration:

1. Not all informal traders should be formalised
2. Cluster informal traders into blocs for ease of tax administration. Structures are already in place in areas like Mbare Msika, Mbare Complex, Mupedzanhamo, Avondale Flea Market and Glen View Home Industry Complex

iii.          Adopt a Simplified Tax System (STS). Introduce a flat tax rate of 3 percent of turnover for informal traders whose monthly income is between US$2 000 and US$100 000. Simplify and streamline regulations for informal traders and SMEs.

1. The country adopts a Block Management System (BMS). Classify the traders into blocs by demarcating the areas in which they do business. The informal traders tax issues are better managed as a bloc instead of individual taxpayers for ease of administration
2. The informal sector in Zimbabwe contributes at least 60 percent to the economy’s recorded GDP and at least US$4 billion is circulating monthly in the sector.

That being said, a simple approach to formalising the informal sector is:

(a)          Explain: Explain what formalisation is

(b)          Make formalisation desirable: Communicate on benefits of formalisation. Reinforce benefits. Partner with empowering services. Engage local authorities and the ministry of SMEs

(c)          Make formalisation easy: Simplify registration procedures. Existing laws should be amended to simplify registration and permits processes. New legal schemes for the self-employed

(d)          Institute legal regulatory frameworks: Institute enforceable commercial contracts.

(e)          Tax the informal sector: Tax (select) informal sector activities

No discussion on taxation issues would be complete without reminding readers about what I call the small returns rule.

When rational businesspeople and entrepreneurs bring their product to the market, they are not worried much about huge profits and slow returns as they are about small profits and quick returns.

Their ultimate goal is to maximise those small/marginal profits.

Traders who do this end up with millions at the end of the trading period.

Thus, if the taxman and policymakers incorporate these (somehow small but) numerous informal traders, the observed aggregate tax revenue collected can be expected, at the very least, to be in millions of dollars.

*Nixon S. Chekenya is a PhD student, distinguished graduate student fellow and teaching and research assistant at Texas Tech University.