solving or mitigating such problems may reap rewards for the government in the form of higher formalization and tax compliance.

Perceived advantages of registration for tax included “better opportunities for growth”, followed by “being legal”, “helping the poor/community”, “access to financing” and “better access to government services.” Disadvantages, as expected, included the financial burden of taxation, and dissatisfaction about government services. Closer examination of SARS’ data on tax returns from SMMEs may be fruitful to better understand that burden.

# **Policy implications**

The picture of formalization is therefore somewhat complex, with relatively few clear opportunities for SARS to encourage higher rates of voluntary tax registration on the basis of their own behavior or performance. Rather, informal businesses seem most encouraged to register when they view government services as “good value” for taxes paid, when they perceive that most businesses (e.g., their own suppliers, customers, and competitors) are paying taxes, and when they are carrying out basic bookkeeping.

Of course, from the point of view of public finance, there may appear to be a “chicken and egg” problem: formalization could be encouraged by improved government services, but such services must be paid for by revenues. Given the fact that small businesses yield only tiny amounts of revenue under the best of circumstances, it is probably the government side that should move first to target improved services in communities where there appears to be high levels of informality; targeting those services that appear to be of most concern to small businesses (i.e., crime, infrastructure and worker skills). Improved services, in turn could form the basis of a coordinated campaign by the GoSA to showcase improvements in public services wherever possible, and to stress the need for higher levels of compliance to expand/improve services. It may also be worth considering whether resources for local governments to pay for critical services are adequate to encourage higher rates of voluntary tax compliance.

While general trends away from reliance on cash payments for transactions and toward electronic and other bank-mediated forms of payment may over time help to encourage more formalization (and tax compliance more broadly), NT and SARS want to look for ways to encourage those trends. Since likelihood for formalization seems to be associated with the practice of proper bookkeeping, it may also be advantageous for NT and SARS to encourage small businesses to maintain regular books, to learn the basics of bookkeeping, and/or to hire the necessary expertise. It would be beneficial to remind small businesses that proper bookkeeping is important for the financial health of all businesses, and critical for any business that aspires to expand. Another key message should be that tax compliance expands business opportunities to enter the supply chain of larger businesses and to gain improved access to larger and wealthier markets. SARS’ SME office (perhaps working in cooperation with SME Associations) may help expand bookkeeping training for small businesses, especially in conjunction with the new turnover tax, which is designed to be handled by entrepreneurs with limited accounting skills. Working in cooperation with SME associations may be the most effective way to deliver both the training and the “message.” 29