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Taxation embodies the social contract between the state and its citizens, where fiscal exchange acts as a balancing mechanism. Compliance and legitimacy in taxation systems are reinforced when taxpayers perceive tangible returns for their contributions reflecting a healthy social contract in action. Let me explain this statement.
Most people think of taxes as a legal burden, something we pay because we must. But taxation is far more than a financial obligation. It is, in fact, a deal, a social contract between the state and its citizens. Like many contracts, it’s rarely read, seldom discussed, and often misunderstood. Yet, it underpins the very functioning of society. This “tax deal” is built on two key principles: the social contract, which legitimises the authority of the state, and fiscal exchange, which ensures that taxpayers receive value in return. Together, they form the foundation of voluntary tax compliance, a critical ingredient for national development and public trust.
The social contract - The unspoken agreement: The idea of a social contract dates back to philosophers like Hobbes, Locke, and Rousseau. It suggests that individuals agree implicitly or explicitly to be governed in exchange for protection, justice and public services. In this context, taxation becomes a moral and civic duty. Citizens contribute financially to the state, trusting that their money will be used to uphold rights and deliver essential services. This is the part of the deal most people never read - taxation is not just about money, it’s about legitimacy. When the state honors its side of the contract, citizens are more likely to accept their tax obligations as fair and necessary.
Fiscal exchange - The return on your contribution: Fiscal exchange theory gives this contract a practical face. It treats taxation as a kind of transaction-citizens pay taxes, and in return, they expect public goods such as roads, schools, hospitals, security, and more. When these services are delivered effectively and equitably, the deal feels fair, trust grows and compliance increases. But when services are poor, mismanaged, or corrupted, the deal breaks down. Citizens begin to question why they should pay at all, which results in lower tax morale, increased evasion, and a weakened state-citizen relationship. In this way, fiscal exchange is not just about economics, it is about trust, fairness, and accountability.
Voluntary compliance - When the deal feels right: Voluntary tax compliance is the willingness to pay taxes without coercion which thrives when the social contract is strong and fiscal exchange is visible. People are more likely to comply when they believe their taxes are making a difference. This is especially true in countries like Tanzania, where public service delivery is still developing. In such contexts, enforcement alone is not enough. Citizens need to see real improvements in infrastructure, education, healthcare, and governance. When they do, paying taxes becomes a shared responsibility and not a forced obligation. The tax deal becomes something they believe in and not just something they endure.
Case in context -Tanzania: In Tanzania, the social contract between citizens and the state is increasingly strained. Citizens expect improved infrastructure, healthcare, and education, however, according to a 2022/23 report by the National Bureau of statistics, only a small fraction of the Mainland population is actively registered for tax (4.7 million which equates to 7% of the population). This means of projected population of above 60 million, only about 4.7 million people are carrying the burden of the social contract. In essence the majority do not pay taxes, yet they expect public service delivery. This gap is largely due to the informal sector, which according to Tanzania Investment and Consultant Group Limited (TICGL) employs approximately 71.8% of the workforce and contributes over 50% of the GDP yet remains largely outside the formal tax system.
TICGL further indicates that SMEs represent 95% of all businesses in Tanzania and contribute 35% of the GDP, employ more than 5 million people. However, not all SMEs are in the formal sector, in fact a large portion operate informally, do not pay taxes and do not comply with labour or business legislations. The main reason why the SMEs opt to remain informal is that SMEs face high tax burdens including a 30% corporate tax and 3.5% Skills Development Levy which is essentially a tax on creating employment. These burdens, combined with complex registration and licensing procedures and an environment where mistakes are punished through hefty penalties rather than education discourage formalization as these put their going concern and growth at risk.
In recent times the Government has implemented governance reforms, including the 2025 amendments to the Tax Administration Legislation, aimed at improving tax compliance and transparency. These reforms focus on integrating Electronic Fiscal Devices (EFDs) with real-time reporting systems, enhancing digital taxpayer services, and expanding the tax base particularly by targeting the informal sector and small businesses. Alongside these technical upgrades, the Government has also launched public education campaigns and stakeholder engagement initiatives to foster voluntary compliance and build trust in the tax system.
To evaluate the effectiveness of these measures and the social contract enhancement, literature suggests using indicators like service delivery outcomes, tax morale surveys, and citizen trust levels. Romzek and Johnston’s[1] study on contract accountability emphasises that transparency and responsiveness are key to restoring public confidence in fiscal governance.
Time to read the fine print: Taxation is not just a tool for raising revenue. It reflects the mutual responsibilities between the state and its citizens. The social contract provides the moral foundation. Fiscal exchange delivers the practical value. When both are honored, voluntary compliance follows and with it, stronger governance and deeper public trust. We may not have read the tax deal when we signed it, but it’s never too late to understand it and to hold both sides accountable.
[1] Romzek, B. S., & Johnston, J. M. (2005). State social services contracting: Exploring the determinants of effective contract accountability. Public Administration Review, 65(4), 436–449.https://www.researchgate.net/profile/Barbara-Romzek-2/publication/249397998_State_Social_Services_Contracting_Exploring_the_Determinants_of_Effective_Contract_Accountability/links/5c06af20a6fdcc315f9c1212/State-Social-Services-Contracting-Exploring-the-Determinants-of-Effective-Contract-Accountability.pdf?_tp=eyJjb250ZXh0Ijp7ImZpcnN0UGFnZSI6InB1YmxpY2F0aW9uIiwicGFnZSI6InB1YmxpY2F0aW9uIn19
