Tax compliance and representation in Zambia’s informal economy

Policy brief State

  • 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 when and why some informal workers pay these taxes and, in turn, how tax compliance affects political representation.
  • To do so, a survey was conducted with more than 800 informal traders and service workers located in or near 11 different markets in Lusaka, Zambia, complemented by semi-structured interviews with local and government stakeholders.
  • The findings show that where informal workers have access to services within the markets, such as toilets, clean water, drainage, and garbage collection, they are more likely to pay taxes and fees to the relevant authorities.
  • Furthermore, results from a vote choice experiment suggests that paying taxes increases demands for a government representative to respond to the specific service delivery needs of informal workers rather than those of the broader urban populace.
  • Overall, the paper provides support for the fiscal exchange hypothesis and shows that improvements in how tax money is used can enhance revenue mobilisation, even among a relatively poor segment of the population.