The Extent and Determinants of Tax Gap in the Informal Sector: Evidence from Ghana

Abstract

In this paper, we attempt to estimate the tax gap in the informal sector as well as the contributing factors of the tax losses in SSA countries using Ghana as a case study. Using micro data on non‐farm household enterprises obtained from the sixth round of the Ghana Living Standards Survey as well as data on quarterly tax payable by specified small scale enterprises derived from the Small Tax Payer office of the Ghana Revenue Authority, the findings show that the national potential and actual taxes in the informal sector are US$ 81 974 846 and US$ 25 023 273, respectively, reflecting an estimated national tax gap or loss of approximately US$ 56 951 573. Firm level variables such as type of business, urban location and experience of the firm significantly increase the propensity to pay tax and reduce the tax gap. Copyright © 2018 John Wiley & Sons, Ltd.