Broadening a country’s tax base plays a vital role in domestic revenue generation which in turn
influences economic growth and development. However, in Ghana greater majority of
individuals and businesses within the informal sector do not pay tax. This study attempts to
estimate the tax gap within the informal sector and also investigates determinants of the
propensity to pay tax among non-farm informal enterprises in Ghana. Using the sixth round of
the Ghana Living Standards Survey, the tax gap was estimated by computing the difference
between the potential and the actual annual tax payments. A logistic regression method was used
to ascertain the determinants of the propensity to pay tax whilst an Ordinary Least Square (OLS)
procedure was used to estimate the factors that explain the tax gap.
The study finds that the country’s informal sector has the potential to pay GH¢327,899,384.00 as
taxes. However, the actual tax paid in a year per our estimation is GH¢ 100,093,092.00. Thus the
estimated national tax loss is GH¢ 227, 806,292.00 per annum. Comparing the actual tax paid to
the revenue generated by enterprises within the informal sector indicates that the actual tax paid
represents just about 0.54% of their total revenue in a year.
The results from the econometric estimations of the study show that several firm owner and firm
level characteristics influence the propensity to pay tax as well as the tax gap in the informal
sector of Ghana. With regards to the firm owner’s characteristics, evidence from the study shows
that male firm ownership and having at least primary education qualification significantly
increases the propensity to pay tax and reduces the tax gap as expected. Also in line with
expectations, our estimates show that firm level variables such as firm sales, bank savings, type
of business, urban location as well as experience of the firm significantly increases the
propensity to pay tax and reduce the tax gap. The policy implications emanating from the study
are as follows: Firstly, there is the need to intensify public education, particularly towards
women micro entrepreneurs on their tax responsibilities; secondly, financial inclusion should be
vigorously promoted within the informal sector by government or the Bank of Ghana to make
more enterprises in this sector bankable, as a firm saving in the bank was found to correlate with
its propensity to pay tax.