Informal Sector Tax Compliance Issues and the Causality Nexus between Taxation and Economic Growth: Empirical Evidence from Ghana

Revenues generated from taxes constitute a major source of income for governments. However, the epic display of tax evasion by individuals and firms in most countries has induced researches on the factors accounting for tax evasion in developing countries. Therefore, this study is conducted to investigate the determinants of the informal sector compliance issues and the causality nexus between tax evasion and Gross Domestic Product (GDP). This research solely adopts the theory of planned behavior in analyzing tax compliance issues. The research work is divided into two parts. In analyzing the informal sector compliance issues, questionnaires were submitted to 600 respondents comprising informal sector taxpayers in all the ten regions in Ghana. Regression analysis was employed in our study to depict the results of the informal sector compliance issues. The result revealed that attitudes, subjective norm and perceived behavioral control are the main determinants of the informal sector compliance issues. The second part of this research examined the causality between taxes and GDP in Ghana’s economy over the period of 1980-2015. The data were analyzed by employing the Augmented Dickey Fuller Unit Root test, the variables were found to be integrated of the order one and the Johansen test showed the presence of co-integration between the variables. The Granger causality test for the study indicated a unidirectional causality from taxation to GDP. Therefore, the study recommends that efforts should be geared towards the improvement of tax systems in order to augment the GDP of the country.