Abstract

The relationship between informal economies and taxation presents critical challenges for tax compliance, 
perceptions of fairness, and the legitimacy of the state. This study examines how the prevalence of informal 
economic activity shapes individuals’ willingness to comply with tax obligations and influences broader 
governance outcomes. Drawing on compliance theories, the paper highlights the interplay between economic 
incentives, enforcement mechanisms, and tax morale in determining compliance behavior. It further explores how 
procedural and distributive fairness perceptions particularly regarding transparency, equity in tax burdens, and 
accountability affect citizens’ trust in government and their intrinsic motivation to pay taxes. The analysis 
demonstrates that in contexts with large informal economies, weak administrative capacity and limited provision 
of public goods often undermine tax compliance and reinforce perceptions of illegitimacy. Informal taxation 
systems and alternative governance structures may emerge, sometimes substituting for state functions but often 
exacerbating inequality and coercion. Evidence suggests that voluntary compliance is more sustainable when tax 
systems are perceived as fair, inclusive, and responsive to citizens’ needs. The study concludes that strengthening 
state legitimacy in such contexts requires a combination of tailored enforcement strategies, improved public 
service delivery, and inclusive policy frameworks that integrate informal actors into the tax system. Enhancing 
transparency, accountability, and participatory governance is essential for fostering tax morale and building a 
sustainable fiscal social contract between citizens and the state.