Informal Economies and Taxation: Legitimacy, Compliance, and Fairness

Nabirye Amina Okwir

Faculty of Business and Management Kampala International University Uganda

                                                                                        ABSTRACT
The informal economy constitutes a substantial share of employment and economic activity across developing and emerging economies, presenting significant challenges for taxation, state legitimacy, compliance, and equity. This paper reviews the relationship between informal economies and taxation by examining the conceptual foundations of informality, the role of state capacity, and the factors influencing tax compliance among informal economic actors. It explores how legitimacy, trust in government, social contracts, and perceptions of fairness shape taxpayers’ willingness to comply with tax obligations. The study further evaluates policy instruments designed to encourage formalization, including simplified tax regimes, administrative reforms, technological innovations, and compliance monitoring systems. Particular attention is given to the principles of horizontal and vertical equity, distributional consequences of formalization, and comparative experiences from emerging and developed economies. The review demonstrates that taxation of the informal economy cannot rely solely on enforcement measures but must be supported by credible institutions, transparent governance, equitable tax policies, and improved public service delivery. Evidence suggests that voluntary compliance increases where taxpayers perceive taxation as legitimate, fair, and accompanied by tangible public benefits. Conversely, weak institutions, high compliance costs, corruption, and limited state accountability undermine both tax morale and formalization efforts. The paper concludes that sustainable taxation of informal economies requires an integrated approach that balances revenue mobilization with fairness, inclusiveness, and institutional legitimacy, thereby strengthening the social contract between governments and citizens while promoting long-term economic development.

Keywords: Informal Economy, Tax Compliance, State Legitimacy, Tax Fairness and Formalization.

CITE AS: Nabirye Amina Okwir (2026). Informal Economies and Taxation: Legitimacy, Compliance, and Fairness. IDOSR JOURNAL OF ARTS AND MANAGEMENT 11(2):111- 117. https:/doi.org/10.59298/IDOSRJAM/2026/112.111117