Informal Sector and Loss of Tax Capability (Case Study: Kohkilouye Va Boyer Ahmad Province)

The tax capability of each region depends not only on people’s ability to pay taxes, but also on government’s ability to receive it. The great portion of a region’s informal sector indicates government’s lack of control over the economic activities in that region. Therefore,with the great share of the informal sector, ability of the government for receiving taxes and as a result the tax potential is reduced. However, part of the informal sector businesses, if supported, can be transferred to the formal sector (upgradable informal sector) and affect the tax potential of the society positively. This paper attempts to assess the effect of the upgradable informal sector of Kohgiluye and Boyer Ahmad Province on the tax potential of the region. An assessment of the lost tax potential in each major economic sector of the province indicates that approximately half of the informal sector’s businesses of the province is upgradable and can be transferred to the formal sector.