Publication - Working Paper
Publication - Policy Brief
Despite conventional wisdom that informality is defined by being outside the tax net, informal workers in developing countries often encounter a range of taxes to community, municipal, and national authorities. They also can be coerced to make payments to non-state entities, such as party youth leagues and vigilantes, in exchange for security. This study examines...
Urban informality, tax compliance, and accountability in Zambia
What drives tax compliance among informal sector workers in Africa? And does taxation strengthen accountability between governments and the informal sector? These questions are hugely important in Africa for a number of reasons. First, the informal sector plays a critical role in contributing to structural transformation, particularly by facilitating production and employment linkages between rural areas and secondary towns and cities. Secondly, in decentralised settings, tax revenue is critical for generating the fiscal autonomy needed for local governments to invest in public goods and services. Thirdly, taxation has long been viewed as an essential component for reinforcing the social contract between states and citizens. However, tax collection remains notoriously low in much of Africa and faces even further difficulties, including administration costs, when applied to the informal sector.
In urban Zambia, where approximately 72 percent of the labour force works in the informal sector, improving tax compliance among this constituency is a policy goal to increase domestic resource mobilization. Official definitions of the informal economy vary, but they all generally refer to a source of self-employment in which workers are not recognized or protected under labour legislation, lack key social protections, and work irregular hours in potentially unsafe conditions or undefined workplaces. Over the last decade, the Government has attempted to improve taxation of the sector through the introduction of presumptive taxes on minibuses in 2004 and base taxes on marketeers in 2005. Yet, these have been relatively unsuccessful in generating significant tax morale. At the same time, many of the municipal councils have struggled to raise adequate revenue from the rates and levies that they charge marketeers, even though markets are one of their main sources of council revenue.
In addition to drawing on secondary survey and administrative revenue data, the project will collect primary data through a survey with 600 informal workers across 10 of Lusaka’s markets. The survey will help probe four potential reasons for low compliance. These reasons include uneven enforcement by authorities, the failure of marketeers to see how taxes are used for relevant services, perceptions about inequitable tax burdens applied across different types of informal workers, and opaque lines of authority over who is responsible for taxation, including the Lusaka City Council and market associations. Using a vote choice experiment, the project also looks at the relationship between taxation and accountability, including whether those who pay taxes feel empowered to pressure the local government for not only better services but also for mitigation against informal sector harassment.
Ultimately, the project aims to uncover feasible policy options to improve compliance without undermining the entrepreneurial and employment gains contributed by the informal sector. In doing so, the project will engage with the Zambian Revenue Authority (ZRA), the Lusaka City Council (LCC), the Ministry for Local Government (MLG), and associations of informal workers, such as the Zambia National Marketeers Credit Association (ZANAMACA) and the Alliance for Zambian Informal Economy Associations (AZIEA).