ABSTRACT
This
study examined tax knowledge, tax attitude, and perception of tax fairness as
predictors of tax compliance among income earners in Lagos state. A total of
three hundred working class adults were selected purposively from Lagos state
to participate in the study.
Result
from the study indicated positive relationship between tax attitude and tax
compliance (r = 0.71, p<.05). This implies that participants who had
positive attitude towards tax also had high scores on tax compliance, tax
perception and tax compliance (r = 0.63, p<.05). This implies that
participants who had positive perception towards tax also had high scores on
tax compliance, and significant positive relationship between tax knowledge and
tax compliance (r = 0.47, p<.05). This implies that participants who scored
high in tax knowledge reported high scores on tax compliance. Also, tax
attitude significantly predicts tax compliance, β = 0.71, t (286) = 12.62, p<0.05. Tax attitude explained 48% of
variance in tax compliance scores, R2
= 0.48, F (1,286) = 159.23, p<0.05. Similarly, result indicated
that tax perception significantly predicts tax compliance, β = 0.80, t(286) =
16.83, p<0.05. Tax perception
explained 26% of variance in tax compliance scores, R2 = 0.26, F
(1,186) = 283.39, p<0.05. In the
same vein, result indicated that tax knowledge significantly predicts tax
compliance, β = 0.58, t(286) = 20.67, p<0.05.
Tax knowledge explained 43% of variance in tax compliance scores, R2 = 0.43, F (1,286) = 410.80, p<0.05.
Findings
from this study suggests that feelings of unfairness and liability from tax
need to be addressed before effective tax compliance can be realized.
Keywords:
tax knowledge, tax attitude, tax compliance, perceived tax fairness
TABLE OF CONTENTS
Title
page............................................................................................ i
Table of
contents...................................................................... ii
List of
tables................................................................................... iv
List of
figures............................................................................... v
Abstract..........................................................................................
ix
CHAPTER
ONE: INTRODUCTION
1.1: Background to the
study..........................................................
1.2: Statement of the
problem........................................................
1.3: Objectives of the
study.............................................................
1.4: Significance of the
study........................................................................
1.5: Definition of
terms..............................................................................
1.6: Scope of
study.......................................................................................
1.7: Literature
review....................................................................................
1.7.1: Theoretical
framework................................................................
The Slippery Slope Framework...........................................................
1.7.2: Other relevant
theories............................................................
Prospect theory.................................................................................
Theory of planned
behaviour.......................................................
1.7.3: Empirical
review....................................................................................
1.8: Research
questions..............................................................................
1.9 Research
hypotheses.......................................................................3
CHAPTER
TWO: METHODS
2.1: Setting.................................................................................................
2.2: Participants...........................................................................................
2.3: Design................................................................................................
2.4: Instruments........................................................................................
Tax Compliance
Questionnaire..............................................
Tax Attitude
Questionnaire........................................................…….
Perception of Tax Fairness
Questionnaire.................................
Tax Knowledge
Questionnaire........................................ ……
2.5: Procedure......................................................................... …..
2.6: Data analysis........................................................................
CHAPTER THREE: RESULTS
CHAPTER FOUR: DISCUSSION
CHAPTER FIVE: CONCLUSION
5.0 Summary
of findings................................................. ….. 37
5.1: Implication
of the findings.................................... …… 37
5.2: Suggestions
for future studies............................... ….. 38
5.3: Recommendations................................................... ….. 38
REFERENCES
APPENDIX
LIST
OF TABLES
Table 1: Table
of Mean and standard deviation of variables
Table 3.1a: Pearson
r correlation between tax attitude and tax compliance
Table
3.1b: Regression analysis for predictive
relationship between tax attitude and tax
compliance
Table 3.2a: Pearson r correlation between tax perception
and tax compliance
Table
3.2b: Regression analysis for
predictive relationship between perception of fairness
and tax compliance
Table 3.3a: Pearson r correlation between tax knowledge and
tax compliance
Table
3.3b: Regression analysis for predictive
relationship between tax knowledge and tax compliance
LIST
OF FIGURE
Figure
1: Influence of Tax Attitude, Perception of Fairness, and Tax Knowledge on Tax
Compliance. Based on Fallan (1999), Schisler (1995), Gillingham and Richardson (2005)
CHAPTER
ONE
INTRODUCTION
There is a popular saying attributed to Benjamin
Franklin that goes thus: “the only things inevitable are death and taxes”. The
inevitability of taxes is tainted by the fact that people can choose to either
comply or evade tax. To this end, the concept of tax compliance has been
constructed and studied with a view to understand tax payers behaviour towards
tax payment. The psychology behind taxation is a relatively new field of
inquiry under the domain of economic psychology and by extension
industrial/organisational psychology. This research is an inquiry into
determinants of tax compliance in Lagos state with tax attitude, perception of
tax fairness, and tax knowledge serving as explanatory variables.
Kirchler
(2007) defined tax compliance as the willingness of tax payers to pay their
taxes. According to Alm (1991), tax compliance is the accurate reporting of
income and claiming of expenses in accordance with the stipulated tax laws. Franzoni
(1999) defined it as a true reporting of the tax base, correct computation of
the liability, timely filing of the return; and timely payment of amounts due. Tax compliance refers to the willingness of people to
comply with tax authorities by paying their taxes (Peter & Dijke, 2007). According
to Brown and Mazur (2003), tax compliance is multi-faceted measure and it can
be defined by considering three distinct types of compliance such as payment
compliance, filing compliance, and reporting compliance.
Failure
to report or pay tax is referred to as tax noncompliance. Tax compliance is a complex set of behaviour which has
been researched from two major perspectives: economic and psychological. Psychological
research into tax compliance considers the impact of several factors. The
underlying reason is that any behaviour has more than one explanation, tax
compliance appears to be an important construct with more than one dimension.
The relevance of tax attitude to the study of tax
compliance is underlined by Kirchler et al. (2008) who proposed that taxpayer
who has favourable attitude towards tax evasion is expected to be less
compliant and equally taxpayer with unfavourable attitude is likely to be more
compliant. Perception of tax fairness plays a fundamental role in tax
compliance because people who feel a tax law is unfair are more likely to evade
tax than those who feel the tax law is fair. Perception of tax fairness is
often viewed from a social comparison standpoint. Individuals compare their
situations with other groups and select information from those that are similar
to theirs. Gcabo & Robinson (2007) distinguished between internalization,
identification and compliance, and specified how these determine tax evasion
behaviours namely: the individual exchange relationship with the government,
social orientation, and opportunities for tax evasion. These factors have both
direct and indirect effects on tax attitudes.
Knowledge of tax enables taxpayers to know how their
taxes are computed and how to report taxes. It has been observed that some
people do not know how to file tax reports that’s why they do not comply with
taxes. The complexity of tax systems in many countries have been criticised,
most laws are usually too complex to be understood and studies show that
knowledge about taxes is generally limited among the general populace. This
influences compliance because the individual may not know exactly how much to
pay, how to go about payment, when payment is due etc.
1.1
Background of Study
The extent to which the tax payers perceive a tax
system to be fair influences their attitude to pay their taxes (Coskun, 2009).
Alabede et al. (2011) postulated that, a tax payer whose motive is to
demonstrate his beliefs in a system will evaluate the fairness of the systems
with objectivity whereas the taxpayer whose attitude is motivated by what
benefit to derive from the system may label the tax system fair only if he is
benefiting from it. Also Richardson (2006) indicated that perceived fairness of
tax system is significantly related to tax non-compliance. Roth et al. (1989)
and Jackson and Milliron (1986) found that tax payers concerns about fairness
have links with attitudes and behavioural intentions about tax compliance.
Therefore, to understand a particular individual tax payer’s behaviour, it is
important to identify the determining variable of behavioural intentions (Hanno
and Violette, 1996).
Apart from individual tax payers’ perception about the
fairness of the tax system, its complexity or otherwise influences the
compliance of tax payers. Terkper (2007) advanced the reason that tax payers
demonstrate various degrees of compliance owing to factors such as lack of
understanding of the tax laws; improper book keeping and apathy towards
government. Jackson and Milliron (1986) contended that the complexity of tax
system has been considered as a possible reason for tax non-compliance. To Young
, Danny and Daniel, (2013) the rules should be simple and clear allowing
taxpayers ability to compute their tax returns without getting confused.
Apart from the factors identified as independent
variables in this study (tax attitude, perceptions of tax fairness and tax
knowledge) research point out other factors that are implicated in tax
compliance. These factors include the willingness to pay for public provision,
pubic education, tax morale, tax information etc. As there are some limitations
to include all non‐economic factors for the analysis of behaviour of tax
compliance, most studies pay attention on just one or several factors for
rigorous analysis.
Tax compliance is a conscious decision made by
taxpayers. This decision, as most, is made by taxpayers based on their level of
knowledge and conception about taxation. Knowledge of taxes forms the basis for
evaluations and perceptions of fairness about taxes, willingness and ability to
comply with the law. Kirchler (2007) emphasized that tax knowledge is organised
by taxpayers to form meaningful expression about taxation. These taxpayers may
not even have accurate knowledge about taxation, however, they make judgement
and appraise the tax system based on what they think they know about tax.
Knowledge about tax influences people’s attitude and
perception about the fairness of tax, and consequently, their compliance level
(Chau & Leung, 2009).
1.2 Statement of the Problem
The issue of tax compliance stems from the fact that
in different countries half or more of the taxes that could be collected remain
uncollected and/or unaccounted for due to a combination of tax evasion,
avoidance, tax exemptions and corruption (Fuest and Riedel, 2009). In
developing countries, like Nigeria, and developed countries this poses serious
problems because income taxes are important source of revenue to government (Teera
and Hudson 2004). Tax evasion, which refers to deliberate non-payment of tax by
citizens, has continued to increase despite attempts by governments to curb it.
This has led to an erosion of the tax base in some countries.
This erosion of the tax base has detrimental fiscal
effects and there are at least four reasons for concern. First, revenue losses
from non-compliance are critical in the context of substantial budget deficit
(Tanzi, 1991). Second, tax evasion may have harmful effects on economic efficiency
in general (Chand and Moene, 1999; Tanzi, 2000a), and income distribution in
particular because the effective tax rates faced by individuals and firms may
differ due to different opportunities for evasion (Hindriks et al. 1999).
Third, underground economic activities are often the other face of tax evasion
and the expansion of these may affect implementation and outcomes of economic
policies (Tanzi 2000b; Cowell 1990). Finally, evasion and citizens’ disrespect
for the tax laws may go together with disrespect for other laws and contribute
to undermine the legitimacy of government (Graetz et al. 1986). Consequently,
tax evasion can have unintended negative effects on a society, undermining the purpose
and outcomes of the formal tax system.
1.3
Objectives of the Study
This research has the general goal of
investigating tax attitude, perception of tax fairness and tax knowledge as
predictors of tax compliance. Specific objects are listed below as:
1. To determine the relationship between tax
attitude and tax compliance among Lagos tax payers.
2. To determine the relationship between
perception of tax fairness and tax compliance among Lagos tax payers.
3. To investigate the relationship between
tax knowledge and tax compliance among Lagos tax payers.
1.4
Significance of Study
Tax
evasion is a pressing problem that is growing by the day. In Lagos, the
government is actively involved in developmental projects which would only mean
more expenditure. A huge tax gap poses liability to the government and would
stifle projects before they are executed. Studies in psychology show that the
best way to reduce noncompliance is by understanding its causes. Thus, it is
important for government to know causes of tax noncompliance with the aim of
marketing itself effectively to citizens.
This study will add to the sparse
literature on the subject of tax compliance in Nigeria. Researchers who are
interested in the psychology of tax could draw insight from this work as well
as make improvements to it. The Lagos state government which stands a lot to
gain from tax compliance could get benefits in terms of higher compliance by
focusing on methods based on psychology as it seeks to compel compliance from
more citizens.
Furthermore, the recommendations drawn
from this work could assist government in its effort at compelling tax
compliance from citizens. Research points to the fact that earlier methods
adopted by governments concentrated on judicial and economic factors when it
came to seeking tax compliance. Nevertheless, psychological interventions are
behavioural and could be more successful. This research which is
psychologically oriented offers more efficient means at obtaining tax
compliance.
1.5 Definition of Terms
Tax: a compulsory unrequited payment to the
government (Organisation for Economic Cooperation, 2008)
Tax
Compliance: refers
to willingness of tax payers to pay their taxes as and when due.
Tax
Evasion: is the deliberate breaking of the law in order to
reduce the amount of taxes due. However, it could result from calculation
errors or inadequate knowledge of tax laws
Tax Attitude: refers
to thoughts, behaviours, and emotions of a taxpayer that emanate from the
subject of tax.
Tax gap: this
is the difference between the expected and the actual revenue generated by tax
authorities. Such a gap exists due to individuals and businesses understating
their incomes or overstating their deductions. Tax authorities also contribute
to tax gap via assessment errors (Gcabo & Robinson, 2007)
Perception of Tax
Fairness: is defined as the subjective interpretation
individuals give to the existing tax laws with regards to whether they are
equitable and are not a burden to the populace.
Tax Knowledge: refers to understanding of taxation with regard
to how it is administered, and how its laws are applied.
1.6 Scope of study
This study explored the role of tax
attitude, perception of fairness and tax knowledge as predictors of tax
compliance. It covers the concept of tax compliance from theoretical and empirical
perspectives. The geographical scope of this study is Lagos, a state that is at
the forefront of development in Nigeria, which has also made concerted efforts
into the issue of taxation.
1.7 Literature Review
Tax Attitude and Tax Compliance
Attitudes represent the positive and negative
evaluations that an individual holds of objects. It is assumed that attitudes
encourage individuals to act according to them. Thus, a taxpayer with positive
attitudes toward tax evasion is expected to be less compliant than a taxpayer
with negative attitudes. Attitudes towards tax evasion are often found to be
quite positive (Kirchler et al., 2008), implying that most taxpayers tend to
avoid paying taxes. Many studies on tax evasion found significant, but weak relationships
between attitudes and self‐reported tax evasion (Trivedi, Shehata, and Mestelman,
2004).
A model of tax evasion behaviour developed by Weigel,
Hessing and Elffers (1987) considers social and psychological conditions,
including attitudes and moral beliefs about tax evasion’s propriety, as
antecedents of tax compliance. Data collected from fined tax evaders and honest
tax payers showed that attitudes explain in part self‐reported
tax evasion, but are insignificant predictors of actual behaviour. However, the
correlations between self‐reported tax non‐compliance
and attitudes are significant but fairly weak. These findings suggest a rather
complicated relationship between tax evasion and attitudes, nevertheless we can
be confident in our general prediction that if tax attitudes become worse, tax
evasion will increase (Lewis, 1982).
Tax attitudes are mostly viewed from two perspectives,
the power and the trust dimension. On the one hand, favourable attitudes will
contribute to trust in authorities and consequently will enhance voluntary tax
compliance. On the other hand, attitudes towards the authorities will be
relevant for the interpretation of the use of power as benevolent or malicious.
Tax attitudes in general also depend on the perceived use of the money
collected and therefore are connected to knowledge (Kirchler et al., 2008). Alm
(1998) observed that some people won’t pay taxes if they dislike the way their
taxes are spent, if they feel that government is unresponsive to their wishes,
if they don’t participate in decision making or if they feel they are treated
unfairly by the government.
Compliance attitude is also affected by the perceived
quality of political institutions. If tax payers perceive that their interests
(preferences) are properly represented in political institutions and they
receive a desirable mix of public goods, their willingness to pay taxes
increases. On the other hand, a state in which corruption is rampant is one in
which citizens have little trust in authority and thus low incentive to
cooperate. A more encompassing and legitimate state will lead to higher tax
compliance because it tends to increase taxpayers’ positive attitude and
commitment to tax system (Smith, 1992; Smith and Stalan,1991).
Perceptions of Tax Fairness and Tax Compliance
According
to Thomas (2012), a fair tax can be described as one where the greater burden
of the tax is borne by individuals who are more financially well-off and
capable of paying the tax. Tax fairness is a perception or belief that the tax burden is
equitably distributed amongst the tax paying population where by people of
similar economic circumstances are treated equally (Mubiru, 2009).
Initial work on tax fairness dimensions was done by
Gerbing (1998) who undertook a survey to identify the existence of five
fairness dimensions: general fairness/distribution, exchange with government,
attitude towards taxes of the wealthy, progressive versus flat tax rate, and
self-interest. The majority of research on taxpayers’ perceptions of tax
fairness has been undertaken mainly in developed countries. Perception of tax
fairness is based on the principle of equity which states that tax payers of
the same levels should be taxed similarly that is to say tax payers with equal
abilities should pay the same amount of tax. Wealthier citizens should pay more
in tax than less privileged citizens.
In their research, Gilligan and Richardson (2005)
noted that tax system that is perceived as unfair by the citizens may likely to
be less successful and this will encourage the taxpayers to engage in
noncompliant behaviour. Kirchler (2007) and Wenzel (2004) suggested that
fairness can be conceptualized as distributive justice, procedural justice and
retributive justice. Distributive justice is concerned with fairness in
exchange of resources in both the benefit and cost, while procedural justice
refers to fairness in the process of resources distribution and retributive
justice is concerned with about the fairness in appropriateness of sanctions
when rules are broken.
Kinsey and Grasmick (1993) study supports the theory
that horizontal equity plays a role by boosting tax compliance. According to
them, if an individual perceives his/her tax burden to be about the same
magnitude as that of significant others, tax compliance increases. The results
by Spicer and Becker (1980) and De Juan, Lasheras and Mayo (1994) point in the
same direction. Kinsey and Grasmick (1993) and Roberts and Hite (1994) stressed
that vertical unfairness of tax schedule (the progresssivity of income tax)
increases tax evasion. In Stigliz (1993) opinion, for the tax system to be
perceived fair, people who are better off should pay more taxes than poorer
people and those with the same economic status should pay similar taxes.
Gilligan and Richardson (2005) analysed fairness
dimension factors on tax compliance for two distinct countries, one developed
and the other emerging. The statistics showed that there were significant
variations of opinions between the participants from Australia and Hong Kong as
it relates to general fairness, tax rate structure on the ability to pay and
self-interest. Australians indicated slightly lower mean scores for tax compliance
behaviour. The findings from the study su;ggested that there are no universally
accepted relationship between the different aspects of tax fairness perceptions
and tax compliance behaviour.
Azmi and Perumal (2008) attempted to reinvestigate the
importance of tax fairness dimensions, as indicated in Gerbing (1998), for
Malaysia. They found that Malaysians perceived the tax system to be moderately
fair. Utilising the principal component factor analysis, responses of
respondents suggested that only three dimensions: general fairness,
distribution of tax burden, and exchange with government were statistically
significant among Malaysians when identifying tax fairness.
Research on fairness indicates that most people do not
like paying taxes. The studies on the Asian territory suggested that taxpayers
were generally more satisfied with the current tax system than Australians and
Americans. Such variations may be due to the differences in the history of
communities as it relates to culture and ethical behaviour.
Numerous studies have been published on the
relationship between tax fairness perceptions and tax compliance. Survey data
from 1960-1980 by Etzioni (1986) documented that the fairness perception was
more likely to affect tax compliance rather than tax rates. Turman (1995) and
Roth et al. (1989) confirmed that fairness perceptions influence tax compliance
behaviour. Similarly, Gilligan and Richardson (2005), Roberts (1994), Hite and
Roberts (1992), Porcano and Price (1992), Harris (1989), and Song and Yarbrough
(1978) found tax compliance to be significantly associated with perceptions of
an improved tax system.
Tax Knowledge and Tax Compliance
Knowledge about tax laws also plays a major role in
determining taxpayers’ compliance behaviour (Eriksen and Fallan, 1996). Tax
knowledge is an essential element in a voluntary compliance tax system (Kasipillai,
2000), particularly in determining an accurate tax liability (Palil, 2005). Without
tax knowledge, there is a tendency for taxpayers not to comply with the tax law
either intentionally or unintentionally. This was postulated by McKerchar
(1995) who studied small business taxpayers. She suggested that small business
taxpayers were not even aware of their tax knowledge shortfall and this might
lead to unintentional non-compliance behaviour.
The influence of tax knowledge on tax behaviour was
documented by Schisler (1995), who carried out a study comparing tax preparers
and taxpayers. Schisler found that taxpayers had significantly lower fairness
perceptions compared to tax preparers. The result might be due to the absence
of tax knowledge among taxpayers compared to tax preparers. Fallan (1999) later
confirmed Schisler’s (1995) findings that tax knowledge significantly changed
attitudes towards the fairness of the tax system. In that experimental study,
the author measured tax knowledge through an additive index of 12 questions
concerning tax allowances and tax liabilities.
Unlike Fallan (1999), who simply focused on technical
knowledge of tax, an earlier study by Harris (1989) separated tax knowledge
into fiscal awareness and technical knowledge, in order to observe the impact
of each type of knowledge on fairness perceptions. The findings revealed that
types of tax knowledge impacted fairness perceptions and consequently
compliance behaviour. This study was supported by White et al. (1990), who
suggested that a formal class in taxation would enhance the knowledge about the
law and appreciation of fiscal policy goals, thus increasing perceived
fairness.
One factor identified under tax knowledge is
simplicity of the tax system. Silvani and Baer (1997) outlined the importance
of the fact that a tax authority should have a simple tax return system from a
taxpayer’s point of view. A tax authority might assume its tax return is simple
and easy to complete but it may not be so from the taxpayers’ point of view.
Therefore, before the final and actual version is delivered to taxpayers, it
would be normal to put the forms through a series of ‘pilot’ tests to validate
that the tax return is simple and easy to complete. Evidence suggests that
uncomplicated tax returns play a major role in improving tax compliance
(Silvani and Baer, 1997).
Although tax knowledge and the simplicity of tax
returns have a different impact on compliance (Kirchler, 2008), it is noted
that a taxpayer with low tax knowledge may be able to file the tax returns
accurately provided the tax returns are simple, clearly explained and
consistent. Some research has found positive association between complexity and
non-compliance, whether intentional or unintentional (McKerchar, 2002; Ritsema,
Thomas and Ferrier, 2003; Blanthorne and Kaplan, 2008) while others have found
that the impact of complexity on compliance varied with the characteristics of
individual taxpayers; such as income level, education level, perceptions of
fairness and equity and the opportunity to evade. In contrast, Clotfelter
(1983) evidenced that when the level of complexity increased (for non-business
taxpayers in the case of this study) it significantly increased non-compliance
among taxpayers. The reason behind this finding was because business taxpayers
were more likely to seek advice from tax practitioners as complexity rose;
hence the issue of complexity appeared to be significant to them.
Figure 1: Influence of Tax Attitude, Perception of
Fairness, and Tax Knowledge on Tax Compliance. Based on Fallan (1999), Schisler
(1995), Gillingham and Richardson (2005)
This
model of tax compliance is drawn from the review on tax knowledge, perception
of fairness and tax attitude. The basic premise is that taxpayer’s level of tax
knowledge influences their perception of tax fairness. This is in line with Fallan (1999) and Schisler’s (1995) whose findings
show that tax knowledge significantly changed attitudes towards the fairness of
the tax system. Hence, verifying the role of tax knowledge in tax compliance
behaviour.
Perception of fairness is shown to play a direct role
in tax compliance. The way taxpayers perceive equity in the tax system affects
their level of compliance. This is discussed in the work of Gillingham and
Richardson (2005) who showed that perception of fairness has significant impact
of tax compliance.
Tax
Attitude is a determinant of tax compliance. Several research points to the
role that it plays with regards in tax compliance (Kirchler et al., 2008,
Trivedi, Shehata, Mastelman, 2001). Attitude is a broad concept that embodies
cognition, behavior and feelings towards a particular object, event, person
etc. Tax attitudes include thoughts, behaviours and feelings which may either
be positive or negative depending on the disposition of the tax payer. Perception
of fairness is a crucial factor that determines tax attitude.
1.7.1 Theoretical
Framework
The Slippery Slope Framework
The slippery slope
framework was developed as a holistic framework, summarizing existing branches
of tax compliance research (Kirchler et al., 2008). The framework rests on the
assumption that the socio-political culture within a society determines the
route to achieve cooperation within a state. If the interaction between
authorities and taxpayers is characterized by mutual trust and by a prevailing
service-client approach (synergistic climate), taxpayers feel committed to the
law and pay their taxes honestly and spontaneously; thus, they show voluntary
tax compliance. If trust is high, taxpayers perceive a duty in fulfilling societal
needs. However, in a climate of distrust and when there is a low level of
respect between tax authorities and the government on one side and citizens on
the other, the authorities need to stress their power to regulate the citizens’
behaviour. In this case, tax compliance is promoted by external incentives,
such as audits and fines.
Within the slippery
slope framework, tax compliance may be voluntary or enforced. Voluntary
compliance is assumed to be high if taxpayers trust their authorities; enforced
compliance is assumed to be high if taxpayers perceive the authorities to have
a high level of power. One major task of tax authorities is to set tax
contributions at an appropriate level to guarantee finances for public
expenditures. This might be achieved either by strengthening trust or by
exerting power. In both cases, the behavioural outcomes of taxpayers result in
high tax contributions. In the first case, compliance is voluntary; in the
second case, it is enforced.
The concept of trust
within the theoretical framework is characterized by its relational aspect
(Eberl, 2003) and refers to the concept of “social trust”; thus, it is not
conceived as calculative trust (i.e., the result of a rational calculation
between gains and losses to maximize outcomes; Tyler, 2003). It is defined as
“a general opinion of individuals and social groups that the tax authorities
are benevolent and work beneficially for the common good”(Kirchler et al.,
2008). Generally, power can be defined as the capacity of coercion by
authorities, where prosecution and punishments regulate tax compliance (Becker,
1968). More precisely, within the slippery slope framework, power is conceived
as the taxpayers’ perception of the ability of the authority to detect and
punish tax fraud (Kirchler et al., 2008).
Although several
studies evidence that trust in authorities is positively related to tax
compliance (Richardson, 2008; Scholz & Lubell, 1998; Torgler, 2003; Torgler
& Schneider, 2005), empirical evidence is not clear regarding the effect of
power on compliance (Kirchler, Muehlbacher, Kastlunger, & Wahl, 2010).
Harsh prosecution and heavy fines do not always increase taxpayer honesty, but
they augment taxpayers’ strategic behaviour and increase efforts to find other
ways to exploit the law (Kastlunger, Kirchler, Mittone, & Pitters, 2009;
Wahl, Kastlunger, & Kirchler, 2010). Thus, a cops-and-robbers relationship
between taxpayers and authorities develops, and the power of authorities comes
to be seen as being coercive.
The slippery slope
framework received its name from the fact that maintaining or achieving a high
level of tax compliance in a social system is like operating on a slippery
slope. Trust and power are assumed to operate in a complex interaction with
each other. Power can fuel trust, but it can also corrupt it: Authorities that
are unable to exert power to combat tax evasion might be perceived as less
trustworthy because they cannot prevent exploitation of the tax system.
Moreover, in a synergistic climate of cooperation, exertion of power might not
provide any surplus. It may even have the unintended effect of crowding out
trust (Feld & Frey, 2002a, 2002b).
Finally, in an
antagonistic climate in which authorities are not trusted, power and the
resulting coercion might be most effective in increasing compliance. But in
this situation, taxpayers might merely find more sophisticated ways to exploit
the laws and engage in legal methods of tax avoidance.
Several empirical
investigations on the assumptions of the slippery slope framework showed
promising results. One of the first empirical studies (Wahl et al., 2010)
analysed the relationship between trust and voluntary compliance, as well as
between power and enforced compliance, in both a survey and an experimental
study. In subsequent studies, the relationships between the variables specified
in the framework were confirmed (Muehlbacher & Kirchler, 2010) and shown to
be consistent across different economic and cultural systems (Kogler,
Batrancea, Nichita, Pantya, Belianin, & Kirchler, 2013; Muehlbacher,
Kirchler, & Schwarzenberger, 2011). Kogler and his colleagues used a
scenario planning technique to manipulate trust and perceived power in Austria,
Hungary, Romania and Russia, by describing the political and tax climates in a fictitious
country. Results showed that the condition of high trust led to greater
voluntary tax compliance and the condition of high power to greater enforced
tax compliance.
1.7.2 Other Relevant Theories
Prospect Theory
Prospect theory is probably the framing effect most
relevant to tax compliance. The theory which explains how people evaluate risk,
holds that people are risk averse in regards to gains but risk-seeking in
regards to loss. Consequently, the manner in which a decision is framed will
affect a person’s willingness to take risks. In income tax, for example,
whether an issue is framed as a bonus for those with children (such as a child
credit) or a penalty for the childless will affect a taxpayer’s attitude toward
the provision. It also means that a taxpayer will be more willing to take risks
(not comply) when the issue is framed as a loss (penalty from an audit) than as
a gain (a bonus from a refund). Consequently, the manner in which information
is communicated to a taxpayer can have a major impact on his willingness to
comply with the tax laws.
According to prospect theory, tax compliance should
increase if paying taxes is seen as a gain not a loss. If a taxpayer views his
situation as interconnected with the nation’s either because he or she is a
collectivist and/or through identification with the nation, then taxpaying is
more likely to be viewed as a gain than a loss. One study suggests that if a
taxpayer views taxes as a national obligation, then after tax income is the
taxpayer’s reference point and therefore: tax compliance decisions are made in
the gain domain, which leads taxpayers to pursue risk-averse behaviour. On the
other hand, if the taxpayer considers paying taxes as loss, then his/her
reference point would be their income before tax. In this case, the taxpayer
will be likely to engage in risk-seeking behaviour.
Theory of Planned Behaviour
The Theory of Planned Behaviour (TPB) is the extended
version of the Theory of Reasoned Action (TRA), and is a dominant theoretical
framework used in explaining human behaviour (Ajzen, 1991). The TPB model
depicts that behavioural intention is the immediate determinant of the actual
behaviour. Behavioural intention is, in turn, determined by attitudes towards
behaviour, subjective norm and perceived behavioural control.
In a taxation context, Bobek (1997) applied the TPB
model with the inclusion of the moral obligation variable. Ajzen (1991)
stipulates that attitudes towards compliance reflect feelings of favour and
disfavour towards compliance behaviour. The contention has been shown by Davis
et al. (1989) in information technology studies. Bobek (1997) found that
attitudes explained compliance behaviour when the belief-based attitudes
measure was used. A recent study by Loo et al. (2007) also emphasized that attitudes
towards the tax system positively influenced compliance behaviour.
Two dimensions of attitudes are worth considering in
this study, namely affective attitude and instrumental attitude. Affective attitude
deals with emotions such as feeling happy, sad or guilt if performing certain behaviour
while instrumental attitude refers to a more cognitive consideration to which
performing a behaviour would be advantageous (Breckler & Wiggins, 1989). It
is also believed that a positive attitude towards the tax system is in fact the
result of positive fairness perceptions. In other words, positive fairness
perceptions may act as the antecedent of a positive attitude. Thus, it is
anticipated in this study, that taxpayers with positive perceptions on the
fairness of the tax system are more likely to have positive attitudes towards
the tax system and consequently encourage them to comply.
1.7.3 Empirical
Review
Mukasa (2011)
investigated the relationships
between tax knowledge, perceived tax fairness and tax compliance of small and
medium enterprises. The study adopted a cross-sectional research design,
combined with qualitative (analytical and explanatory) and quantitative
(descriptive and inferential) research designs. The study considered tax
registered small and medium enterprises (SME) within the Central Division of
Kampala District who constituted the population of study. The sample size of
the study was 330 respondents and self administered questionnaires were used to
collect data from the SMEs’ owners or managers. The study found out that, tax
knowledge and perceived tax fairness had a causal relationship with tax
compliance. Tax knowledge was found to have a positive and significant
relationship with tax compliance as well as perceived tax fairness did with tax
compliance. However, the relationship between tax knowledge and perceived tax
fairness was found to be weak. These findings imply that positive improvement
of taxpayers’ knowledge and perceptions of fairness about taxes will lead to
improved tax compliance.
Mubiru (2009) examined the relationship between perceived fairness
to tax payers, perceived enforcement of penalties and tax compliance in Uganda
specifically of selected Small Business Enterprises (SBEs) in Arua district. A
cross-sectional design combined with descriptive and analytical research design
was used in the study. The survey population included tax payers operating SBEs
in Arua district and a sample of 375 was considered for this survey. The
findings of the study revealed that SBEs which complied did so because they
perceived the presumptive income tax fair to them and those which never
complied perceived the tax system unfair to them. The study also show a significant
relationship between perceived enforcement of penalties and tax compliance,
however it shows a stronger relationship between tax fairness and tax
compliance.
Saad (2010) investigated fairness perceptions and
compliance behaviour among salaried taxpayers in Malaysia. Data was collected
through survey questionnaires which were distributed to a sample of 2,267
persons with the help of Human Resource Personnel or Head of Department in the
respective organizations. The findings revealed that taxpayers perceived the
current income tax system as fair but there was no conclusive evidence that
such a perception had an influence on compliance behaviour. Instead, attitudes
and subjective norm were found to be most influential. Furthermore, tax
knowledge and tax complexity were shown to affect fairness perceptions.
Lozza, Kastlunger,
Tagliabue, & Kirchler (2013) examined the relationship between
political ideology and attitudes toward tax compliance among Italian taxpayers.
They
conducted a quantitative survey involving 272 participants and two online focus
groups with self-employed taxpayers in Italy, and found significant differences
between left-leaning and right-leaning taxpayers. These two groups were
characterized by two different pathways that lead to greater tax compliance,
and attached different meanings and values to tax behaviours. In particular,
left-leaning taxpayers expressed higher levels of voluntary cooperation and
showed reactance to the coercive power of authorities, whereas right-leaning
taxpayers expressed higher levels of enforced tax compliance and were more
averse to tax evasion with increased trust in authorities and institutions.
Coetzee (1993) investigated perceptions of South
African taxpayers concerning the tax system in South Africa. Findings from this
study show that the two main reasons people dislikes paying tax stem from the
fact that it is compulsory and secondly from the inability to immediately
perceive the benefit of such tax.
Loo,
Mckerchar, & Hansford (2007) assessed tax knowledge and tax compliance
among Malaysian taxpayers at the time self-assessment was introduced. The research method employed was case study
of 74
individual taxpayers. Generally, it was found that subjects exercised more care
when filing their income tax returns to ensure that they only paid the tax
required and that penalties were not imposed for non-compliance. Some
participants found the tax law to be too complicated and were unable to keep
abreast of its frequent changes.
Palil (2010) examined the level of individual
Malaysian taxpayers’ knowledge and explored how tax knowledge levels influence
tax compliance behaviour. Data was collected through a large scale national
postal survey resulting in 1,073 responses. Five stages were used to facilitate
the analysis. Stage 1, using the t-test and ANOVA, focuses on the
characteristics of taxpayers’ knowledge including gender, ethnicity,
educational level and income level. Stage 2 attempts to describe the
relationship between tax knowledge and tax compliance using multiple
regressions. Stage 4 examines taxpayers’ compliance determinants more widely
than tax knowledge. Nine variables were tested in Stage 4. Control variables
were added in both Stage 3 and Stage 5 in order to assess whether the inclusion
of control variables significantly affects tax compliance behaviour. The
results suggested that tax knowledge has a significant impact on tax compliance
even though the level of tax knowledge varies significantly among respondents.
The results also indicate that tax compliance is influenced specifically by
probability of being audited, perceptions of government spending, penalties,
personal financial constraints, and the influence of referent groups.
De
Villiers (1996) found that South Africans have negative attitudes towards
taxation. His study involved four groups. Results from the study revealed that
all groups considered tax rates too high and should be reduced. Only 19% of
black respondents indicated that they understand the process of taxation and
registering of taxpayers. The author proposed that low level of knowledge about
tax issues contributes to low level of compliance.
Alabede, Ariffin, & Idris (2011) investigated individual taxpayers’
attitude and compliance behaviour in Nigeria, while considering the moderating
role of financial condition and risk preference. The data of the study, which
were collected through a survey of individual taxpayers’ opinion, were treated
statistically using moderated multiple regression. The result of the study
indicates that taxpayer’s attitude towards tax evasion is positively related to
compliance behaviour. Furthermore, the study also reveals that taxpayer’s risk
preference has strong negative moderating impact on the relationship between
attitude towards tax evasion and compliance behaviour.
Chittenden and Foster (2008) employed a multi-cultural
approach to investigate tax simplicity, tax transparency and tax burden. The
study analysed Hong Kong, Singapore, Canada, the United States, the United
Kingdom and Australia. On average, the respondents agreed that the tax system
in their country is fair. For Hong Kong and Singapore, the study found that
generally taxpayers viewed the tax system as fair and simple to understand due
to better communication from tax authorities. For Canada, the US, Australia,
and the UK, the respondents’ ratings averaged below neutral. Taxpayers
consistently gave Hong Kong and Singapore’s tax systems good ratings when
questioned on the tax structures’ simplicity and transparency while Australia
and the UK had the lowest ratings.
Abdul-Razak & Adafula (2013) evaluated taxpayers’ attitude and its
influence on tax compliance decisions in Tamale, Ghana. Survey responses from
questionnaires administered to operators of SMEs in Tamale, were quantitatively
analysed. Both descriptive and inferential statistics were applied. The results
indicated that, individuals are highly concerned with the amount of taxes they
pay. The rates of income taxes in Ghana are generally perceived to be high.
Furthermore, the burden of taxes paid affects the attitudes of individuals and
this informs how they evaluate the tax system and consequently their compliance
decisions. Individuals have little regard for the amount of taxes paid by them
in comparison to amounts paid by higher income earners. It was further revealed
that, the level of governmental accountability and transparency did not
significantly impact taxpayers’ attitudes. The perceived level of benefits
derived from the provision of public goods and services particularly physical
infrastructure was high. The results further indicated that, individuals did
not clearly understand the tax laws. A significant positive statistical
relationship (R=0.72) was found to exist between levels of understanding and
tax compliance decisions.
A cross-cultural study by Richardson (2005) on tax
fairness perceptions and tax compliance behaviour in Australia and Hong Kong
documented that tax fairness perceptions about general fairness had a
significant impact on tax compliance behaviour in both countries. Additionally,
in Australia, it was found that tax fairness perceptions about special
provisions, tax rate structure and self interest had some significant
relationships with tax compliance behaviour.
Summary of Review
Tax
compliance is a behavior with considerable implications and broad application
to society. Given its relevance to government, it is no surprise several
studies are currently been carried out to investigate the subject of tax
compliance and its determinant. Tax attitude, perception of tax fairness, and
tax knowledge have been shown to be valid predictors of tax compliance.
Empirical and theoretical studies have consistently reported positive
relationship between these concepts. The research questions and hypotheses that
follow in this study are based on the findings of literature review.
1.8 Research Questions
The following research questions were
constructed and tested in this study:
1.
Is there a relationship
between tax attitude and tax compliance among Lagos tax payers?
2. Does
perception of fairness predict tax compliance among Lagos tax payers?
3. Does level of knowledge about tax determine
tax compliance among Lagos tax payers?
1.9 Research
Hypotheses
1. There will be significant positive
relationship between tax attitude and tax compliance.
2. There
will be significant positive relationship between perception of tax fairness
and tax compliance
3. There will be significant positive
relationship between tax knowledge and tax compliance.
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