An analysis on the impact of informal growth on tax performance a case of Zimbabwe: 1985 to 2013

Abstract

The informal sector in Zimbabwe is among the most buoyant sector yet contributes marginally to tax revenue collection. There are views that taxation evasion is huge due to lack of knowledge and information and heavy costs of compliances resulting from their varieties and sizes. There seems to be a consensus that African governments and their tax authorities have to put more effort to bring the informal sector into the tax bracket. The aim of the study is to identify the impact of informal sector growth on tax performance in Zimbabwe based on time series analysis of data from 1985to 2013. The study also seeks to observe if informal sector growth increase tax revenue. Identifying the relationship between informal sector growth and tax performance will help out to improve the tax base hence economic development. . Econometrics views 7 (e-views 7) was used to estimate a log linear model for tax performance in Zimbabwe. The study established that although the informal sector growth has a positive coefficient its contribution to tax revenue is insignificant. moreover there are other variables which significantly contribute to tax revenue which includes share of mining, share of manufacturing and share of construction.

The study recommends that Government should prioritise the formalisation of the informal sector. Therefore efforts needed by governments are to widen the tax base and will greatly increase revenue leading to a reduction in the reliance on donor funding and also on incidences where governments are forced to increase taxes on basic commodities. Informal sector has a significant employment, income generation potential and stimulation of social economic growth.