Informal sector taxation : the case of Zimbabwe.

Abstract

The economic crisis in Zimbabwe has had a profound impact on the labour market. As job opportunities in the formal sector have shrunk due to the contraction of the economy, the informal sector has been showing rapid growth. This contraction of the economy has also had a negative impact on the government’s ability to collect tax revenues. It is within this context that this study seeks to analyse the Zimbabwean government’s recent attempts to collect taxes from its large informal sector. The study draws on conventional tax theory from the public economics literature to inform the evaluation of the informal sector tax system. The study also draws on the political economy approach to taxation (and the state failure literature in particular) given that this analysis occurs in Zimbabwe, a failing state. The three main objectives of the work are as follows: 1) To describe the informal sector tax code in Zimbabwe and to explain how it relates to the broader tax system in the country, as well as to analyse the rationale for its introduction; 2) To investigate the challenges and successes in implementing the taxes in the informal sector in the context of the economic and political crisis; and 3) To analyse the informal tax system in terms of equity and efficiency. Given the lack of reliable official (quantitative) data on Zimbabwe, this study is primarily based on documentary evidence and qualitative work. Qualitative interviews were carried out with 16 key informants from the Zimbabwe Revenue Authority, the Ministry of Small and Medium Enterprises Development, academia and business organisations. A total of 47 informal sector operators from four activity classes (i.e. transport operators, flea market operators, hairdressing salons and cottage industries) were also interviewed. The findings presented in this thesis indicate that there have been some successes in taxing the informal sector in Zimbabwe. However, the study shows that informal sector taxes have been poorly administered. The findings also show that informal sector taxes are generally inequitable visà- vis formal sector taxes. Furthermore, the implementation of presumptive taxes has induced changes in behaviour among those in the informal sector in their attempts to evade these taxes, resulting in economic inefficiency. Given that very few academic studies on informal sector taxes in Zimbabwe have been conducted, it is hoped that this work will begin to fill the gap in the Zimbabwean context, as well as to contribute to the small but growing literature on informal sector taxes in developing countries more generally.