details on the structure of the surveys for each country in the core sample.<sup>7</sup>

# **2.2 Method: Proxy for Informal Consumption Using Places of Purchase**

Our main methodological innovation is to use the place of purchase reported for each expenditure to assign a probability that it was obtained from a formal (tax remitting) source. Most recorded can be of into seven expenditures classified by place purchase categories. The first five pertain to purchases of goods. Ranked by ascending order of retailer size, these are: (1) non-market consumption (e.g. home production); (2) non brick-and-mortar stores (e.g. street stalls, public markets); (3) corner and convenience stores; (4) specialized stores (e.g. clothing stores); and, (5) large stores (e.g. supermarkets, department stores). Purchases of services can be allocated to two main categories: (6) services provided by an institution (e.g. banks, hospitals); and, (7) services provided by an individual (e.g. domestic services).<sup>8</sup> Combined, these categories account for 86% of total household expenditure. The remaining 14% are items for which no place of purchase is specified, primarily utilities, fuel and telecommunication (see Figure A3).<sup>9</sup> We assign each category to either the formal or informal sector. We define a category as belonging to the formal sector if it is likely that consumption taxes are remitted on most from that to this retailers are purchases category. According definition, many informal because they evade taxes due on their sales. Alternatively, small retailers may be informal because they are not required to register for consumption taxes due to their size. We do not distinguish between these channels, as both imply that these retailers do not remit consumption taxes. In addition, these concepts are closely related: in countries with low enforcement capacity, the scope for evasion among small firms is such that the net revenue from bringing them into the tax net is small and outweighed by administrative and compliance costs (Ebrill et al., 2001; Keen and Mintz, 2004).

The key assumption behind our assignment method is that larger retailers are more likely to be formal. This is in part mechanically true, as a frequently used criteria for compulsory tax registration is firm size. In addition, a large literature argues that larger firms are less likely to evade taxes. Theoretically, Kleven et al. (2016) develop a model of tax evasion in which informality must be sustained by collusion between firm managers

> 7 Replication codes for the paper can be accessed here. This includes the cleaning files of each expenditure survey and the files generating the tables and figures of the paper. The data are not provided as we had to require access to the World Bank or Stat Agency for each country. Yet, these data are often accessible, allowing for a replication of the paper on a subset of countries of interest.

> 8We also use two smaller categories to classify entertainment services into (8) entertainment (e.g. restaurants) and (9) informal entertainment (e.g. food trucks).

> 9We exclude housing expenditure due to limited data on owner-occupied imputed rents.

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