Countries can fund public services even when many people work outside formal payroll systems. Governments collect revenue from several sources—not only deductions on monthly payslips—and can finance schools, hospitals, water systems and social assistance from general taxation. The harder problem is building a tax system that raises enough money fairly, while giving people with irregular incomes access to protection.
Imagine a street-food seller, a seasonal farm worker and a self-employed repairer. Their earnings may be genuine but irregular. They may not receive a regular salary slip or contribute through an employer-based insurance system. Yet their families still need primary healthcare, public transport, safe drinking water and schools.
If a country ties every service to formal wages, it risks excluding a large share of its people. If it finances everything through unstable or unfair charges, its public budget may struggle. The solution is to distinguish how the country raises revenue from how each service is funded and who can use it.
This guide explains how countries fund public services when much work is informal, with practical examples from international tax research and Thailand’s experience of tax-financed health coverage.
Quick answer: a mix of broad taxes and suitable social protection
A government can collect income, consumption, property, excise, corporate and trade taxes, along with other lawful public revenue. These enter budgets and, depending on law, finance services for eligible residents regardless of whether each household contributes through a formal employer.
Some benefits are financed through contributory social insurance. Others are tax-financed public services or social assistance. Countries can combine them, and may adapt voluntary or simplified contributions for informal workers without requiring identical payment schedules from everyone.
The mechanism is economic activity → lawful and fairly administered revenue collection → national and local budgets → reliable funding of services → actual household access → stronger capabilities and economic participation → renewed revenue capacity.
The key question is not whether every street vendor has the same payroll deduction as an office worker. It is whether the fiscal system finances services and protects people without imposing disproportionate burdens on those with the least capacity to pay.
What does informal work actually mean?
The informal economy includes a wide range of work arrangements that may not be fully covered by formal employment, business-registration, taxation or social-protection systems.
It can include self-employment, informal wage work, family labour, seasonal work and household enterprises. Some activities are legal but lightly registered; others may breach particular laws. Informal employment is not a synonym for criminal activity, and income from informal work is not necessarily absent from a country’s economic statistics.
The International Labour Organization’s guide to extending social security describes the problems created when people lack effective coverage and explains how countries can remove financial, legal and administrative barriers.
The policy challenge is therefore broader than detecting unreported income. It includes helping small businesses operate legally, making contributions affordable, ensuring healthcare coverage and extending social protection to people whose employment arrangements do not match the standard employer-payroll model.
The first financial distinction: payroll deductions are only one source
A salaried employee may have personal income tax and social-insurance contributions deducted at source. This is administratively convenient because an employer records wages and sends money to the state or social-insurance fund.
A worker with variable cash earnings may have no equivalent employer or predictable monthly payroll. That can make income assessment and contribution collection harder.
But government revenue can still come from purchases taxed under a VAT or sales tax, imports subject to lawful duties, large-company profits, taxable property, excise goods, royalties and other sources. Whether a particular transaction is taxable depends on the country’s laws, exemptions and compliance.
Thus a person without payroll tax deductions may still bear taxes indirectly. It is incorrect to divide residents into taxpayers and non-taxpayers solely by asking who has a salaried job.
Why consumption taxes matter—and why they cannot solve everything
Value-added taxes and other taxes on spending are often important revenue sources because a government can collect them from registered firms along supply chains rather than assessing every small cash earner’s total annual income individually.
The IMF’s March 2026 explanation of taxation identifies VAT as a major source of revenue across developed and developing economies, alongside income, corporate, excise and other taxes.
Yet VAT has limits. Goods and services may be exempt or outside registration thresholds, compliance may be weak, and consumption taxes can burden lower-income households heavily relative to their resources.
Therefore, an effective fiscal system may balance consumption taxes with progressive income taxes, corporate and property taxation, suitable transfers and fair administration.
A country should not solve a weak income-tax base by making necessities unaffordable for poor households. The full impact of taxes and subsidies must be assessed together.
The second distinction: contributory insurance and tax-financed services
An employee-based insurance scheme often finances benefits from contributions linked to wages. That may work well for regular salaried jobs but create coverage gaps for people who earn seasonally, work independently or move between different forms of employment.
A tax-financed service draws on broader public revenue. Governments can finance public schools, selected healthcare and social assistance without requiring every eligible person to have accumulated employer contributions.
The ILO’s explanation of international social-security standards notes that non-contributory, tax-financed schemes are particularly relevant to people outside contributory systems.
This does not mean tax-financed benefits are automatically adequate, universal or easy to access. Countries must specify eligibility, delivery capacity and benefit quality.
A sensible national design uses the appropriate funding mechanism for the kind of protection being provided, rather than assuming that all services should rely on either payroll contributions or general taxes alone.
Real example: Thailand’s tax-financed Universal Coverage Scheme
Thailand provides an instructive example of how a country can avoid requiring formal payroll contributions for a substantial part of national health coverage.
The ILO’s account of social protection for Thailand’s informal workers explains that the Universal Coverage Scheme was introduced in 2001 to serve people not already covered by existing public health-protection arrangements.
A WHO case study of Thailand’s scheme describes the political and financial decision to finance the scheme from general taxation because collecting contributory premiums from a large informal-sector population would have posed major problems.
This is the key transferable lesson: a public health programme can use tax revenues rather than insisting that each beneficiary has a standard employer payroll record.
It does not mean Thailand’s present benefit package, provider payment rules or budget should be copied unchanged elsewhere. Nor does it mean every worker is covered by the identical arrangement. Different schemes can coexist within one country.
How does a tax-financed service reach informal workers?
Financing is only the beginning. The country still needs an enrolment or eligibility route, an accessible clinic or school, qualified staff and a payment or delivery system.
For healthcare, a government can budget funds for providers according to its chosen mechanisms—for example population-based payments, hospital budgets or payments for defined services. Those mechanisms require their own legal and operational arrangements.
A worker who does not file a traditional employer income return may still be eligible under the tax-financed health programme if the law specifies coverage on another basis.
The distinction is the individual need not personally pay an equivalent payroll contribution to receive a tax-financed public service, while the programme still requires sustainable collective funding.
For the separate eligibility question, see How Countries Decide Which Public Services Residents Can Use.
Can workers with informal earnings contribute to insurance voluntarily?
Some countries provide voluntary social-insurance arrangements, simplified contributions or alternative schedules that recognise self-employment and irregular income.
The ILO’s guidebook on extending social security discusses strategies such as simplifying registration, making contribution procedures more suitable to informal workers and improving access to existing schemes.
For an individual, flexibility may mean payment channels that do not depend on a single formal employer, or contribution levels and frequencies appropriate to legal and economic circumstances.
But voluntary coverage alone may not protect people with very low or unpredictable earnings. Governments may need subsidies or complementary tax-financed protection for people unable to contribute adequately.
An affordable contributions system can strengthen protection; an unaffordable compulsory bill may simply push workers further away from formal registration.
What about simplifying taxes for microbusinesses?
Running a tiny enterprise can involve complex paperwork if the country imposes the same administrative process used by large companies. That may discourage registration even when the individual would owe little income tax.
Some governments therefore develop simplified registration or tax arrangements for eligible small businesses, with clear thresholds and accessible payment procedures. Well-designed systems reduce administrative burden without permitting larger businesses to evade their actual obligations by pretending to be microenterprises.
The IMF’s 2026 taxation overview cautions against expanding taxpayer registries indiscriminately when many informal operators earn too little to owe tax. Improvements can instead include better administration, collection through suitable large intermediaries and focused compliance work.
The objective is not to squeeze maximum immediate revenue from the poorest self-employed household. It is to build a legitimate, sustainable tax base and encourage productive participation.
Why larger firms still matter when many people work informally
A country with a large informal workforce may also contain formal utilities, banks, manufacturers, importers and other registered enterprises.
These firms can collect VAT, remit payroll taxes for formal staff, pay corporate income tax where due and participate in supply-chain reporting. A tax system can concentrate compliance capacity where transactions and taxable incomes are larger and easier to verify.
That approach must be fair. Large companies should not receive exemptions or special arrangements that shrink public revenue without clear public benefit, while small operators bear disproportionate enforcement costs.
The IMF’s research on tax collection and reform discusses how administrative improvements, policy changes and leadership can expand the fiscal capacity needed for public services.
Countries need balance: efficient collection from those legally able to pay, alongside credible services that sustain social trust.
Can governments fund services with grants or borrowing?
International grants, concessional finance, natural-resource revenue and government borrowing may support public spending. They can be especially important during crises or for long-lived investments.
But a permanent wage bill for teachers or health workers needs reliable funding. Debt must eventually be serviced; grant commitments may change; commodity revenue can be volatile.
The ILO’s research on financing universal social protection identifies domestic revenue mobilisation as central while recognising international support for countries with limited fiscal capacity.
The financing plan should distinguish regular spending, such as nurses’ salaries or medicine purchasing, from capital investment, such as a hospital building. Both are essential, but they have different funding and maintenance requirements.
A country should avoid building new infrastructure with temporary money and then discovering it cannot afford the people or supplies required to operate it.
What makes informal income difficult to measure?
Cash transactions, irregular employment, seasonal agricultural production and multiple small sources of income can make exact earnings difficult to document.
An income-based benefit or tax calculation may need to reconstruct annual earnings from records that were not kept in formal payroll systems. A person may earn a high amount during harvest season and very little during the rest of the year.
A rigid monthly assessment can therefore misrepresent annual circumstances. Countries may need lawful approaches to income averaging, self-declaration, reasonable evidence and later correction.
This does not mean authorities should disregard fraud or accept every claim uncritically. It means their verification methods must fit the nature of the work while preserving fairness, privacy and review rights.
Administrative simplicity is valuable only when it remains accurate enough for the decision.
How to fund services without excluding the people who need them
A strong public system separates fiscal contribution from the individual’s entitlement wherever the programme’s purpose calls for that separation.
A child should not automatically be denied a tax-financed public service because a parent lacks a formal employer. A pension programme may still use recognised contribution or residence conditions. A means-tested cash benefit may need information about actual household resources.
Each programme should publish its conditions clearly and provide routes for people whose earnings are irregular or whose work has not been formally recorded.
The goal is not to erase differences between services. It is to make sure that a country’s funding architecture does not unnecessarily exclude people who are lawfully eligible.
The fairness problem: who ultimately bears the burden?
A government can raise more revenue while still increasing poverty if it relies on poorly designed taxes that fall heavily on basic consumption.
Evaluating the full distributional effect means examining household taxes, transfers and the value of public services together. For example, a tax increase that helps fund accessible healthcare can have a different overall welfare effect from the same increase combined with poor service delivery.
Property taxation, higher-income taxation, consumption taxes and corporate taxation have different enforcement, efficiency and fairness considerations. There is no single universal perfect tax mix.
Public trust also matters. When households see corruption, arbitrary enforcement or little benefit from paying taxes, voluntary compliance and willingness to formalise may weaken.
Effective reform combines credible revenue collection with transparent spending and visible public value.
What an effective national financing strategy looks like
A country can use a sequence rather than one dramatic policy.
First, assess actual public needs and the cost of keeping essential services reliable. Second, identify current revenue sources, leakages and tax burdens. Third, distinguish people who are not legally liable to pay from those avoiding taxes they genuinely owe.
Fourth, improve collection where the tax base is real, including large entities and administrative systems. Fifth, remove avoidable barriers to formal registration and suitable insurance contributions. Sixth, protect low-income households from excessive burdens and keep tax-financed safety nets available under law.
Finally, report whether revenue changes finance actual service improvements: staffed classrooms, accessible clinics, reliable water and timely income support.
This is a public-finance and delivery chain—not merely a campaign to register more street vendors.
How can a country measure progress?
Useful indicators include:
- Domestic tax revenue by source, alongside the tax burden across income groups.
- Registration and tax-compliance costs for small operators.
- Number and share of workers with effective social-protection coverage.
- School and health-service access for households without formal employment.
- Contribution continuity among self-employed and seasonal workers.
- Budget reliability for essential services.
- Revenue leakage, corruption risks and successful administrative reviews.
- Whether basic services actually reach rural and urban households.
- Public confidence in the fairness and usefulness of tax-funded services.
Do not treat formal business registrations as the sole success measure. A system can register many people without increasing meaningful protection or service funding.
Common misconceptions
“Informal workers contribute nothing.” They may pay taxes indirectly and support taxable economic activity, even where payroll contributions are absent.
“The answer is simply to charge every street vendor income tax.” Many microenterprises have little taxable income; administrative costs and fairness matter.
“Tax-financed services are free.” They are collectively funded, even where the individual does not pay a fee at the point of use.
“Contributory schemes are unnecessary.” Social insurance can remain valuable, provided coverage adapts appropriately to different forms of work.
“A bigger tax take automatically improves services.” Procurement, institutions, staffing, maintenance and accountability determine whether revenue produces real outcomes.
Frequently asked questions
Do people working informally pay VAT?
They may bear VAT or other consumption taxes when purchasing taxable goods or services. Exemptions, law and compliance differ across countries.
Can a person without a payroll record use public healthcare?
That depends on the country’s programme. Tax-financed schemes can provide coverage based on eligibility rules other than employer contributions, as Thailand’s experience illustrates.
Why not make all social benefits voluntary insurance?
People with little or highly unpredictable income may be unable to pay sufficient premiums. Tax-financed assistance or subsidies may be needed to protect them.
Does formalising businesses increase tax revenue immediately?
Not necessarily. Some firms are below thresholds or lack taxable profits. The long-term value can also include better records, access to finance and social protection.
Are grants a replacement for domestic taxation?
International support may help, but reliable domestic revenue is important for long-term obligations such as salaries and routine operations.
Where this article fits in the country series
For practical country context see How Thailand Works and How Cambodia Works. The precise current tax rules and benefits for each country require their own checks.
For related topics, How Countries Fund Services in Regions With Smaller Tax Bases explains transfers between regions. How Countries Find People Who Qualify for Help but Never Receive It explains access gaps. This article owns the financing problem created by widespread informal work.
Return to How Countries Work | A–Z Guide to 195 Countries and Everyday Life.
Official evidence and further reading
- IMF — The Art of Taxation, March 2026.
- IMF — Taxes and Strengthening Social Protection.
- International Labour Organization — Extending social security to workers in the informal economy.
- ILO — Universal social protection in changing labour markets, April 2026.
- ILO — Social protection for Thailand’s informal economy workers.
- World Health Organization — The political economy of Thailand’s tax-financed coverage scheme.
- ILO — Financing universal social protection.
Evidence reviewed: 21 October 2026. Tax regimes and benefit programmes change. The article offers an explanatory comparison, not tax advice or an individual welfare-entitlement determination.
Final takeaway
Countries do not need every worker to have a standard payslip to operate public services. They do need fair, dependable public revenues, effective collection, appropriate insurance arrangements and access rules that work for real households.
The full mechanism is diverse work → broad and fairly collected public revenue → sustainable budgets → reliable public services → social protection across employment types → improved wellbeing and future productive capacity.