The Informal Sector, the “implicit” Social Contract, the Willingness to Pay Taxes and Tax Compliance in Zimbabwe

Abstract

The growth of the informal sector in African countries has largely been viewed as an escape from regulation and deliberate intention to avoid paying taxes and these views have been widely popularised, ignoring significant details to the disadvantage of realistic tax policy design. Zimbabwe adopted a presumptive tax system for various informal sector categories to enlarge the tax base and increase tax revenues mobilised. However, presumptive taxes have not generated significant revenue. Tax compliance in the informal sector has often been studied from the tax structure design, the deterrence model perspective and capacity limitations without paying adequate attention to tax morale. Tax morale can be denoted through the peer effect of the compliance behaviour of other taxpayers, the fulfilment of the psychological social contract, transparency and accountability in the use of tax revenues as well as stakeholder communication, built on mutual trust and respect. In light of these tax morale dimensions, it is evident that tax compliance can never be divorced from the intrinsic motivation to pay taxes. The inextricable link, between tax evasion, tax compliance and tax morale, motivates this study. While previous studies on tax morale have applied single method research approaches, this study adopted a sequential exploratory mixed method research design, combining both qualitative and quantitative (through the use of document reviews, semi-structured interviews and questionnaires) in order to bring a balanced view. The study found out that tax morale was a strong driver of tax evasion and non-tax compliance in the informal sector.

Industry 4.0 in Financial Services: Mobile Money Taxes, Revenue Mobilisation, Financial Inclusion, and the Realisation of Sustainable Development Goals (SDGs) in Africa

“…It also does not consider the varying circumstances of taxpayers, especially the fact that mobile money platforms are largely used by the underrepresented or underserved segments of the population. Violation of equity lowers tax morale as well as trust in the government and tax morale [29,30].…”

“…Mobile money taxes could also possibly lead to further fracturing of the implicit social contract between a government and its citizens. The implicit social contract presupposes that as citizens pay their fair share of taxes, the government should in turn deliver quality public goods and services to justify the investment in taxes [30]. The tax levied must be fair, transparent, equitable, economic, and convenient.…”

“…These include the pervasiveness of the issue of informality, low tax-to-GDP ratios in most African countries, and the need to widen the tax base and reduce budget deficits [1, 26,28]. The informal sector has grown tremendously in most African countries and contributes very little tax revenue [29][30][31]. Despite the introduction of presumptive taxes, the informal sector remains challenging to tax [32,33].…”

Direct Digital Services Taxes in Africa and the Canons of Taxation

“…Strong and fair tax systems are pivotal to building and maintaining public trust in governments and its institutions, and tax authorities in all economies and more so in African countries where trust in government is generally low (Dancey 2019;Murphy and Harris 2019;Mpofu 2021c;Sebele-Mpofu 2021). Making MNEs contribute to taxes for digital services is key towards building confidence in the fairness of tax systems.…”

Taxing the informal sector through presumptive taxes in Zimbabwe: An avenue for a broadened tax base, stifling of the informal sector activities or both

“…Debate has also surrounded the benefits to be derived from taxing this sector versus the costs and challenges associated with such a move. Researchers have called for taxation of the IS to broaden the tax base, boost revenue generation to fund economic development (Joshi et al, 2014;Rogan, 2019), yet others have queried the logic of taxing the IS in view of its small scale nature, minimal and erratic incomes, lucid nature, heterogeneity and difficulties tracking players, aggressive nature of operators in the sector and low tax morale (Kundt, 2017;Meagher, 2018;Sebele-Mpofu, 2021). Opponents of IS taxation have further argued against taxing it, suggesting it is a means of subsistence and its taxation might be regressive and lead to the closure of small firms, crippling the very activities that are essential for poverty alleviation, employment creation and the provision of a livelihood for the disadvantaged.…”