Since the Tunisian Revolution, political leaders, economists, the press and the general public have tended to take a negative view of Tunisia’s informal sector, estimated to account for more than a third of national GDP and about half of the workforce. The dominant view is that if those in the informal sector paid their taxes and customs duties Tunisia could meet its budget needs with minimal or no borrowing. A policy recommendation popularized by Peruvian economist Hernando de Soto is formalization—integrating the informal sector into the formal economy through incentives and sanctions. Based on annual one-month research visits, in-depth case studies of informal workers, interviews with scholars, policymakers, union officials, and several institutional studies of taxation, this paper argues that the informal sector is not the major culprit. The Tunisia Inclusive Labor Initiative (TILI) study in 2014 demonstrated that nearly 90% of informal workers earn less than 5,000 dinars per year and therefore owe no tax. Regarding customs, smuggling needs to be controlled--especially tobacco, alcohol, drugs and arms—but some contraband products, such as gasoline, actually help the Tunisian economy. Studies by the Ministry of Finance suggest that most lost revenue is due to tax evasion by workers in the formal sector—especially those in the liberal professions such as doctors, lawyers, architects and teachers. Formalization is a partial solution, but possible for only a minority of informal workers. Many Tunisians view the state as corrupt and wasteful—a view substantiated by successive governments which have inflated the bureaucracy, tripled the public sector wage bill, and done little to address the problems that led to the Revolution, such as persistent regional inequality. Many complain that the public services for which they are taxed—schools, health, social security and infrastructure--have greatly eroded. We conclude that there are no easy solutions to Tunisia’s economic problems. Because of massive borrowing, the Tunisian debt now nearly equals the annual GNP, with debt service taking up an increasing share of the national budget. However, a good starting point is to end scapegoating the informal sector and to adopt a coherent development policy that includes robust tax reform, restricting the flat-tax system under which 400,000 individuals and businesses pay only token taxes, and especially collecting taxes from tax evaders in the formal sector.