Hernando De Soto observes referring to the informal sector, "Whether you are inside the bell jar or outside, you will be taxed. What determines whether you remain outside is the relative cost of being legal."
This is extremely important to a functioning government. This means for a tax/regulation to function for revenue collection, it must be lower than the costs of succeeding in tax/regulation evasion plus the risks of punishment.
$$Functioning Tax or Regulation < costs of evading tax or regulation + subjective cost of the risk of punishment$$
Here we have the private benefits of the individual becoming a public bad under bad legal structure. They hide their labor and pay bribes (which fund anti-productive activities). Also the fact that they hide their labor means that the results of their labor are less accessible.