Taxing the informal sector in developing countries: the case of Ghana

Ampaabeng, Alexander (2019). Taxing the informal sector in developing countries: the case of Ghana. University of Birmingham. Ph.D.

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Abstract

Taxing the informal sector poses a significant challenge to every tax authority. The task of designing a system to encourage voluntary tax compliance in the informal sectors of developing economies is a particularly important task given the relative sizes of these sectors in their domestic economies. Due to lack of reliable data about the operators of the informal economy it is difficult to comprehensively understand what produces tax non-compliance, and even less what motivates compliance, however, this information is critical to the design of effective policy. Most tax authorities resort to using blunt and often punitive measures designed to deter evasion rather than promoting long term voluntary compliance.

Existing literature on informal sector taxation in developing countries is limited, and what does exist emphasises development of the tax system rather than understanding the taxpayer. This study draws on research designed for better understanding of taxpayer behaviour in the formal sector and apply it to informal sector taxpayers to explore the degree to which it may inform us of tax compliance motivations in this sector also. The study uses the Ayres and Braithwaite (1992) Responsive Regulatory Theory (RRT) to analyse the impact of a responsive regulatory tax administration on the tax compliance decision of informal sector operators.

Three methods of data collection are used – face-to-face interview, survey and field observation to collect data from the informal sector operators and tax officers in Ghana.

The findings from this study indicate that due to the difficulty in obtaining information about taxpayers and the ease in concealing taxable activities, adopting purely command-and-control and deterrence-based compliance approaches such as intensive auditing and heavy fines will not promote voluntary compliance. The study thus finds that tax morale, relationship with the officials, trust, tax education/knowledge, and tax revenue usage do have significant influence on compliance decisions in this sector in similar ways to those operating as part of formal tax systems.

Type of Work:

Thesis (Doctorates > Ph.D.)

Award Type:

Doctorates > Ph.D.

Supervisor(s):