Informal Economies and Taxation: Compliance, Fairness Perceptions, and State Legitimacy

Nantale Hadijah

Humanities Education Kampala International University Uganda

Email: nantalehadijah@kiu.ac.ug

                                                                                           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.

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

CITE AS: Nantale Hadijah (2026). Informal Economies and Taxation: Compliance, Fairness Perceptions, and State Legitimacy. NEWPORT INTERNATIONAL JOURNAL OF RESEARCH IN EDUCATION, 6(1): 53-60. https://doi.org/10.59298/NIJRE/2026/615360