Improving Tax Collection in Africa Through Public Trust and Transparency

The IMF study reveals that trust in tax authorities significantly impacts tax collection efficiency in Africa, especially in fragile states where distrust and corruption hinder VAT and CIT revenue. Enhancing public trust and digitalization could improve tax compliance and fiscal resilience across the continent.

The IMF Working Paper authored by Telma Yamou, Alun Thomas, and Kaihao Cai, explores the impact of citizens' trust in tax authorities on tax collection efficiency across 32 African nations. Published as part of the International Monetary Fund’s ongoing research initiatives, this study aims to understand how public perceptions of trust in tax departments influence the efficiency of Value Added Tax (VAT) and Corporate Income Tax (CIT) revenue collection. The authors use Afrobarometer survey data collected between 2014 and 2019 to identify a significant relationship between trust levels and tax efficiency. Specifically, they reveal that a 1% increase in the share of citizens with little or no trust in tax authorities leads to a 0.22% decrease in VAT efficiency. This effect is particularly pronounced in fragile states, where governance and institutional stability are lower, suggesting that the social trust deficit magnifies the already challenging environment for tax collection.

Fragile States Face Deep Challenges in Tax Collection

The research highlights that African countries generally experience a substantial gap between their potential tax revenues and what they collect, driven largely by the complex socio-economic conditions across the continent. In particular, fragile states, characterized by weaker governance and institutional capacity, show lower tax compliance and collection efficiency. These findings underscore the importance of public trust in state institutions for effective tax collection, as citizens in these countries appear more hesitant to pay taxes due to perceived risks of corruption and misappropriation. When individuals believe that tax revenues will not be used for public good, they are less likely to comply with tax obligations, which results in a reduction in VAT efficiency. This phenomenon is especially visible in fragile states, where government transparency and accountability are often limited, leading citizens to withhold support for tax policies. Thus, the authors argue that building trust in tax authorities should be a primary focus for governments seeking to improve tax compliance, particularly in regions with high levels of fragility.

Informal Sectors and the “Hidden” Tax Problem

A key finding of the paper is that the informal sector’s prevalence in Africa contributes to tax inefficiencies, especially in fragile states. Many transactions occur outside formal regulatory frameworks, making VAT collection less straightforward than it is in more formalized economies. Informal economies create space for tax avoidance, as both businesses and consumers can collude to bypass VAT remittance, particularly when they perceive tax authorities as untrustworthy. For instance, informal businesses may underreport sales or fail to register, thus avoiding VAT entirely. This behavior is exacerbated in countries where VAT is not automatically collected, reducing the potential for effective tax compliance in sectors where cash transactions dominate. The paper also discusses how corruption in tax authorities affects VAT and CIT efficiency similarly, as perceptions of corruption feed into distrust and undermine voluntary compliance. Citizens are less willing to contribute tax revenues when they believe tax officials are corrupt, a situation that appears especially dire in fragile states where corruption perceptions are often higher. According to the authors, this association between low trust and tax compliance is consistent across studies of tax morale and revenue collection globally, suggesting that enhancing the integrity of tax institutions could yield significant improvements in tax revenue.

Public Trust and the Tax Compliance Link

The authors note that fragile states are particularly susceptible to the negative impacts of low trust, as their weak institutional frameworks make it challenging to enforce tax compliance effectively. The Afrobarometer data shows a high correlation between distrust in the tax department and a lack of transparency regarding how the government uses tax revenues, which adds to citizens' reluctance to pay. The paper presents data indicating that 83% of respondents in fragile African countries report difficulty in determining how tax revenues are spent, which may further explain the link between low tax efficiency and distrust. Additionally, corporations in fragile states are more likely to avoid taxes by engaging in corrupt practices, such as bribery, to evade CIT payments. The authors conclude that for these countries, improving institutional trust is critical to building fiscal resilience, as even minor improvements in public perception can enhance tax compliance significantly.

Digitalization and Tax Efficiency Go Hand in Hand

The study further examines how the digitalization of public services and improvements in digital literacy correlate with higher VAT efficiency. More digitalized governments that offer streamlined, transparent processes for tax payments can see a positive impact on tax efficiency, as citizens and businesses find it easier to comply when digital services simplify tax obligations. However, large informal and agricultural sectors continue to drag down VAT efficiency, as these sectors are challenging to tax consistently. While the share of agriculture in GDP negatively affects VAT efficiency due to lower tax rates in this sector, digitalization, and human capital improvements provide a counterbalance by increasing accessibility and trust in the system. The authors suggest that policies promoting digitalization, combined with efforts to boost public trust, could help to close the tax gap in Africa.

Strengthening Public Trust as a Path to Revenue Growth

The authors argue that fostering trust in tax authorities should be prioritized for building fiscal capacity in Africa. They recommend that policies aimed at enhancing revenue mobilization must also focus on improving perceptions of trust and reducing corruption within tax institutions. Greater transparency about tax revenue allocation, perhaps through fiscal transparency initiatives, would help address citizens' concerns and promote compliance. For fragile states, improving institutional reliability and communication with citizens are essential steps toward bolstering tax efficiency. These recommendations underscore a broader insight from the study: that tax efficiency is not solely a technical issue, but also a behavioral one, highly dependent on citizens’ belief that their tax contributions will be managed responsibly for public benefit.