Tax compliance and informal sector dynamics in Sub-Saharan Africa: Rethinking revenue mobilization for sustainable economic growth
Keywords:
Tax Compliance, Informal Sector, Revenue Mobilization, Economic Growth, Sub-Saharan Africa, Tax Policy, Financial Inclusion, Tax Administration, Informality, Generalized Method of Moments (GMM)Abstract
This study critically examines the intricate relationship between tax compliance, the informal sector, and domestic revenue mobilization within the context of sustainable economic growth in Sub-Saharan Africa (SSA). Against a backdrop of widespread informality and persistently low tax-to-GDP ratios, the research rethinks traditional revenue strategies and explores how the interaction between informality and tax administration affects fiscal and economic outcomes across the region. The primary objective is to assess the impact of informal sector prevalence on domestic revenue mobilization, investigate the link between tax compliance burdens and economic growth, and evaluate whether the effect of tax compliance varies with the level of informality. The study also aims to identify practical pathways for strengthening revenue systems in economies where informal activity is dominant. The study employs a quantitative research design, using panel data from ten SSA countries between 2010 and 2022. Variables include tax compliance (measured by hours spent on compliance), informal sector size (as a percentage of GDP), and revenue mobilization (as tax revenue-to-GDP ratio), alongside control variables such as government expenditure, political stability, and financial inclusion. The analysis utilizes the Generalized Method of Moments (GMM) to address endogeneity, autocorrelation, and unobserved heterogeneity. Findings reveal that the informal sector significantly reduces domestic revenue mobilization, while higher tax compliance burdens negatively affect economic growth. However, the study also finds that tax compliance reforms are more effective in stimulating growth in highly informal economies, indicating a conditional relationship between informality and fiscal outcomes. Financial inclusion positively influences revenue but not short-term growth, and political stability shows no significant effect in this context.
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