In this paper, we use results of a novel survey covering 1,000 firms from 16 different sectors of the Turkish economy along with a two‐sector dynamic general equilibrium model to measure the extent of informality in these sectors. Moreover, we also evaluate the effects of two different policy tools on informality, namely, income taxes and tax enforcement. Our results show that while both are effective policy tools in dealing with informality, tax enforcement is a relatively more efficient tool and tax becomes quite ineffective at lower levels of informality.