Informal workers and taxation in Zambia: Who pays and does it make a difference?

Blog State, Tax, Lusaka, Informal workers, Taxation, Tax compliance, Market services and Public goods

Taxation in Africa has been increasingly covered in the news, especially with controversial attempts in countries such as Benin, Tanzania, and Uganda to tax users of social media sites and phone texting services. While the true intentions of these efforts are debatable, raising sufficient domestic revenue has long been a challenge for many African governments. A long line of scholarship emphasises the importance of taxation for investment, reducing aid dependence, and reinforcing the social contract between states and citizens. Due to these many benefits, Sustainable Development Goal 17.1 and the Addis Ababa Action Agenda focus on strengthening domestic resource mobilisation, especially in Africa.

But why does this matter for the informal sector? Conventional wisdom suggests that, along with a lack of social protection and employment benefits, informality is synonymous with being outside the tax net. However, even if they may not pay income taxes, many of those who labour in the informal sector do indeed encounter a range of other taxes, levies, and fees to national authorities, local government officials, and non-state actors. Due to the size of the informal labour force in many developing countries, focusing on informality is critical if we are to better understand when and why such payments are made and whether they make any difference to the lives of those who do.

Lusaka market workers as target sample

In Zambia, improved taxation is a major objective of the 2017 Economic Stabilisation and Growth Programme and has become increasingly relevant due to growing indebtedness and reduced foreign aid in recent years. In Lusaka alone, the informal economy represents 72% of the labour force and therefore represents a major source of potential financing. Many of those work as second-hand clothes traders, food sellers, hairdressers, and tailors within the city’s more than 60 open air markets, or they hawk their goods along the streets. They have encountered presumptive taxes levied by the Zambian Revenue Authority (ZRA), levies to the Lusaka City Council (LCC) and market cooperatives, as well as payments to political party cadres. Since they generate a relatively high level of turnover, market places in Lusaka, as in other African cities, are attractive targets for taxation; for instance, City Market was estimated by the Ministry of Local Government to generate revenue of approximately 1.2 million Zambian kwacha per month.

To determine what drives some informal workers to pay these taxes while others do not, I implemented a survey with 823 workers in Lusaka during November 2017. I targeted 11 markets in the city, inclusive of six markets controlled by the LCC and five overseen by market cooperatives. Within each market, respondents were randomly selected based on a series of criteria aimed at ensuring accurate gender representation and a diversity of occupations.

Market services matter for tax compliance

Through a series of questions, survey respondents were asked about the frequency and amount of payments that were requested by actors that operate in the markets where they work. Approximately 80% of the sample claimed to pay taxes to the ZRA, the LCC, and market cooperatives. Statistical analyses were applied to understand who paid and who did not. Most importantly, those who claimed that they had higher levels of access to key market services, including toilets, garbage collection, sanitation, and clean water, were associated with a higher likelihood of tax compliance. In addition, those who trade in the markets rather than hawk outside on tables and pavements, were more likely to pay, as well as those who owned their stores and stalls rather than rented them. Other factors, such as a respondent’s socioeconomic status or ethnic identity, played no role in payments.

The fact that tax compliance was tied to service delivery re-affirms a longstanding hypothesis, known as the fiscal exchange hypothesis: citizens are more likely to pay when they receive benefits for their payments in return.

Taxation can have positive spillovers on political decision-making

Because informal workers in markets have close proximity to tax collectors and because the services they expect in return are visible investments in infrastructure, it is highly likely that informal workers would view such payments as a mechanism for bargaining and negotiation. However, assessing whether paying taxes increases demands for political representation is especially difficult in a country that is already democratic. Such assessment is particularly difficult at the individual level since perceptions of effective political representation vary depending on one’s priorities.

To deal with this challenge, I used a vote choice experiment that exposed respondents to three hypothetical mayoral candidates that were similar in terms of gender, education, job, and origin. Only their policy platforms varied. Candidate A was a “law and order” mayor who promised to clean up the streets and remove hawkers. Candidate B is concerned with improving market services and making taxes more affordable. Candidate C campaigned on a platform of improving access and quality to schools and health clinics in Lusaka.

57% of respondents preferred Candidate B to the others. A statistical analysis showed that those who paid their taxes were significantly more likely to support Candidate B over the others. However, those who worked in council markets where hawking is more problematic were more like to favour the “law and order” candidate while women were significantly associated with Candidate C. The latter finding may be due to their traditional roles as caregivers, which increases their awareness of the importance of good healthcare and education.

Policy implications

This IGC project on tax compliance and representation aimed to advance research on the political economy of taxation in developing countries, which necessarily requires focusing on the informal sector where a majority of citizens in those countries work. Encouragingly, the findings largely support existing hypotheses about tax compliance and citizen representation that has been found among formal workers and in developed country contexts. With the issuance of Statutory Instrument No.48 in 2018, which announced that a base tax on marketers would be collected through Zambia’s three mobile phone providers, there could be further opportunities to strengthen these mechanisms of accountability within the country.

In the meantime, a few basic recommendations emerge from the research:

  1. Improve compliance by earmarking money to be reinvested into the markets.
  2. Publicise such earmarking so that informal workers can identify how exactly their money is being used and therefore enhance oversight and
  3. Eliminate taxation that offers no public good and undermines revenue mobilisation efforts. This is especially true for taxation by party cadres, which was experienced by 14% of the sample. Coercive and extortionary forms of taxation by non-state entities for private gain are problematic, and undermine the ability of taxation to contribute to broader state legitimacy.