Zambia’s open-air markets bustle with commercial activity. Over time, bonds have formed among operators, creating social networks, shared social norms, and, in some cases, social organisations capable of articulating the needs and aspirations of those who work in these communities.

As one walks through Kalingalinga market—one of approximately 80 markets in Lusaka—blacksmiths fabricate a plethora of items, from steel window frames used in the construction of upmarket villas in Lusaka, to mbabulas—traditional cooking braziers used in almost every Zambian household. This is the environment where the majority of Zambia’s informal sector firms operate. A strong feature of these markets is that they have become more than mere agglomerations of Micro, Small and Medium Enterprises (MSMEs), and have developed into communities.

With such a strong sense of community, our study hypothesised that social dimensions are integral to these commercial communities and may have a strong influence on the tax behaviour of the individuals who populate them. This is important in contexts like Zambia, and many other developing countries, where the majority of MSMEs are informal and not registered with the state. The problem of low tax compliance among informal operators is a defining feature of what it means to be informal (Chen 2007). Our study, using a variety of methods, finds that tax compliance among MSMEs in the provincial centres of Lusaka and Central Province is dismally low, at a paltry 30%.

Traditional barriers to tax compliance among MSMEs

The formal systems of increasing compliance among MSMEs have historically had limited effects.  Firstly, state capacity in countries like Zambia is constrained by an absence of comprehensive tax collection infrastructure that results in a focus on revenue collection from larger and more formal firms (Kleven et al. 2016). The traditional methods of enforcement have also proved impractical in informal market settings because of the large number of informal firms, their small size, and low turnover. It has thus not always made economic sense to use traditional enforcement methods, such as audits, because they yield low revenue, at high cost.

The social dimensions of tax compliance

The limitations of traditional tax collection strategies make it necessary to leverage factors that influence voluntary compliance, such as building on social bonds that already exist in these communities to design efficient, scalable innovations to increase tax compliance. These social interventions tend to be low cost, and easy to implement, but can significantly assist with revenue mobilisation (Ahmed et al. 2012). Specifically, we hypothesised that business tax compliance may be affected by social norms, the involvement of social organisations in the tax collection system, and whether or not one’s tax behaviour is publicised among one’s social network.

To test these expectations, we conducted a conjoint experiment among small-scale business enterprises in Zambia. We provided firm operators information about a pair of hypothetical tax situations, and randomly introduced:

  • The involvement of a social organisation (a business association) in the tax collection process;
  • The publication of tax behaviour to others; and
  • Variation in social norms about tax compliance.

After learning about the pair of hypothetical tax situations, the respondents chose the situation in which he/she would be more likely to pay business taxes and indicated support for a preferred plan.

We learned three important things about the social dimensions of tax compliance of MSMEs in Zambia:

  1. MSMEs would prefer not to have a business association collecting their taxes

We find that MSMEs do not support the idea of a business association from their community collecting tax from them on behalf of the government. Participants are about 15% less likely to anticipate paying taxes when a business association provides collection services. A possible driver of this is that many MSMEs are not part of any business association in the first place. They, therefore, feel little affiliation to any group potentially carrying out this mandate. Furthermore, in cases where they would be agreeable to a social organisation collecting taxes, participants expressed strong concerns about transparency and accountability. In interviews, some MSME operators shared past experiences where contributions they had made to a business association had been misappropriated and their trust abused.

  1. Publicising the tax behaviour of a firm to their social network has no expected effect on increasing tax compliance among MSMEs

We find that there is likely to be no discernible effect of revealing the tax compliance behaviour of MSMEs to other firms in their social network. Participants anticipate little difference in their tax-paying behaviour regardless of whether or not that behaviour would become public. We learn from qualitative interviews that a possible reason for this could be that MSMEs perceive that the majority of firms are not paying their business taxes and there is a collective sense of acceptance that this is normal for small businesses. There is a notion that MSMEs have low profits and it is acceptable if they do not comply. Noncompliance for this group has become a norm and there is little perceived social risk if information on a firm’s tax behaviour is publicised.  One respondent put it aptly, ‘Small business owners actually believe that the Zambia Revenue Authority (ZRA) should stay away from markets as we do not make much to be able to pay them.’

  1. MSMEs anticipate higher compliance in an environment where norms are absent

Regarding social norms, we find mixed results. We find that participants are about 19% more likely to anticipate paying their taxes in situations where social norms are absent. MSMEs are likely to be more compliant when members of the business community respect each business’ decision whether or not to pay and do not look down on those who do not pay. This is a surprising finding given that tax compliance tends to be high in environments where norms exist. From qualitative interviews, we learn that MSMEs believe that paying tax is a positive thing but that depends on one’s own perceived ability to pay. Many MSME owners view low profitability as an acceptable reason for not complying, viewing themselves as survivalist and poverty-driven. However, this finding warrants further research.

Concluding remarks and policy implications

Our study reveals interesting and even slightly unexpected findings regarding the social dimensions of tax compliance in Zambia. Policymakers should be aware that publicising tax behaviour of MSMEs is unlikely to trigger tax compliance, given the notion among many small business owners that they should not comply in the first place due to their low profits. Additionally, delegating tax collection to business associations is also unlikely to prove effective because of MSMEs indifference and lack of trust in the associations themselves. Our findings suggest that it is the absence of social norms, when businesses feel they can make tax decisions without judgement, that most increases the rate of tax compliance.

Editor’s Note: This blog is part of the IGC’s 10 year celebration series. This blog is linked to our work on  Tax for development.


Ahmed, N, R Chetty, M Mobarak, A Rahman and M Singhal (2012), “Improving tax compliance in developing economies: Evidence from Bangladesh, IGC working paper series.

Chen, M (2007), “Rethinking the informal economy: Linkages with the formal economy and the formal  regulatory environment”, United Nations Department of Social and Economic Affairs DESA Working Paper No. 46 ST/ESA/2007/DWP/46.

Kleven, H, A Khan and U Kaul (2016), “Taxing to develop: When ‘third-best’ is best”, IGC Growth Brief Series 005. London.