Jordan’s shadow economy is no longer a marginal phenomenon that can simply be dismissed as economic activity operating outside the formal system. It has become a serious fiscal and economic challenge—one that affects tax fairness, private-sector competitiveness, worker protection, and, perhaps most importantly, the government’s ability to design policy based on an accurate picture of the economy.

 

The numbers alone should command attention.

 

An official study found that the informal economy averaged 26.5 per cent of GDP between 2002 and 2020, using the study’s composite methodology. A more recent study covering 2019–2023 estimated that the informal economy accounted for approximately 26.9 per cent of GDP in 2023.

 

In other words, this is neither a small nor a temporary phenomenon. It represents a substantial part of economic activity.

 

But the problem goes well beyond the tax revenue that the state fails to collect.

 

The shadow economy also distorts competition. A business operating legally must absorb the costs of taxes, social security contributions, licensing, and regulatory compliance. Its competitor operating outside the formal system may avoid some or all of those costs.

 

That creates an obvious imbalance.

 

Over time, such an environment can weaken the incentive to operate formally, discourage investment in compliant businesses, and encourage some economic activity to remain outside the regulated economy.

 

There is another cost, too—one that is often overlooked.

 

Informal employment generally means weaker worker protection. Informality also produces less reliable economic data and, in many cases, lower productivity. When a significant share of economic activity remains invisible, policymakers are effectively trying to steer the economy without seeing the entire road ahead.

 

Some research estimates that the tax revenue potentially recoverable from informal activity could reach JD1.4 billion a year, although such estimates naturally vary according to the methodology used.

 

This is precisely why tax reform—and particularly Jordan’s National E-Invoicing System—matters.

 

E-invoicing should not be viewed simply as another mechanism for collecting taxes. Properly implemented, it can become an important instrument for building a more transparent economy. By documenting transactions, connecting different parts of the supply chain, and reducing opportunities to conceal sales and revenues, it can narrow the space in which informal activity operates.

 

 

The Income and Sales Tax Department has itself identified combating tax evasion as one of the key objectives of the e-invoicing system.

 

There are already signs of significant adoption. According to recent official data, 87,000 of approximately 140,000 taxpayers were registered in the National E-Invoicing System. The sales of registered taxpayers accounted for around 95 per cent of total sales recorded by the Tax Department.

 

But technology alone will not eliminate the shadow economy. Nor will penalties.

 

A successful strategy must be about bringing businesses into the formal economy, not simply punishing those who remain outside it.

 

That means simplifying registration and licensing procedures, reducing compliance costs for small businesses, offering meaningful incentives for formalization, and linking social protection to formal registration. At the same time, enforcement must become more effective against businesses that deliberately remain outside the system. The objective should be integration.

 

The real battle, therefore, is not against small business owners or entrepreneurs trying to make a living. It is against invisible economic activity.

 

As Jordan expands digitalization, e-invoicing, and the integration of government databases, it has an opportunity to move from an economy in which activity is largely estimated to one in which economic transactions can be better understood: where value is being created, who is selling, who is buying, and who is paying taxes.

 

That distinction matters.

 

The goal of tax reform should not be to extract more from those who are already complying. It should be to bring more economic activity into the system so that the tax burden is distributed more fairly.

 

In the end, reducing the shadow economy is not simply about collecting more taxes. It is about broadening the tax base without increasing the burden on those who already comply.

 

For Jordan, that may be the most important tax-reform equation of all.