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The solution for this is right out of the Microsoft playbook.

They should have adopted the standard, unregulated model, then -gradually- ramped up registration requirements and penalties for being unregistered, until the registration rate was satisfactory. Then -gradually- ramp up taxation until resistance (illegal shops) start rarely cropping up. Then you’ve found your balance of incentives.

From there you come down hard on illegal shops, then ratchet up your taxes, rinse and repeat until your enforcement costs push back against revenue gains… and you now have a new local minimum, and hopefully a stable balance.