Analysis Of Tax Moral And Tax Compliance In Nigeria
Tax morale is an important indicator of tax compliance. This study aims to determine the effect of tax morale on the taxpayer in compliance with tax policies of government in Nigeria. The study adopted survey research design for data collection through standardized questionnaires administered to respondents. A total of 600 randomly selected respondents were selected from a sample size of six organizations in the public and private sectors of the Nigerian economy. The main objective of the study was to determine whether social norms, attitude towards government, tax evasion, tax avoidance, legal system, tax compliance and attitude towards traditional institutions (monarch) have significant effect on taxmorale. We hereby make recommendations that may guide programmes, policy formulation and implementation of government that seek to increase tax payers level of compliance.
1.1 Background to the Study
The subject of taxation has received considerable intellectual and theoretical attention in the literature. Taxation is one of the most volatile subjects in governance both in the developing and developed nations. Tax refers to a “compulsory levy by a public authority for which nothing is received directly in return” (James and Nobes, 1992). According to Nightingale (2001), “a tax is compulsory contribution, imposed by government, and while taxpayers may receive nothing identifiable in return for their contribution, they nevertheless have the benefit of living in a relatively educated, healthy and safe society”. She further explains that taxation is part of the price to be paid for an organized society and identified six reasons for taxation: provision of public goods, redistribution of income and wealth, promotion of social and economic welfare, economic stability and harmonization and regulation.
In other words, a tax is an imposed levy by the government against the income, profits, property, wealth and consumption of individuals and corporate organizations to enable government obtain the required revenue to provide basic amenities, security and well-being of the citizens. First detailed information about taxation can be found in Ancient Egypt (Webber and Wildavsky, 1986). The Pharaohs appointed tax collectors (called scribes) and paid them high salaries to reduce the incentives to enrich themselves. Furthermore, scribes working in the field were controlled by a group of special scribes from head office. Today, corruption of the tax agency is still a problem, especially in developing countries
According to the traditional model of tax compliance by Allingham and Sandmo (1972), taxpayers choose how much income to report on their tax returns by solving a standard expected utility-maximization problem that trade off the tax savings from underreporting true income against the risk of audit and penalties for detected non compliance. In this framework, both the threat of penalty and audit makes people pay their taxes (Allingham and Sandmo, 1972).
Some preliminary tax morale research was conducted during the 1960s by the Cologne School of Psychology, that tried to narrow the bridge between economics and social psychology by emphasizing that economic phenomena should not only be analyzed from the traditional neoclassical point of view but also from social psychology perspective. In particular, they saw tax morale as an important and integral attitude that was related to tax noncompliance.
Tax morale is defined as the “intrinsic motivation to pay taxes”. Torgler (2002) and Fred (2003) stress its relevance to understand the high observed level of compliance. Three key factors are important in understanding tax morale: they are, moral rule and sentiments, fairness and the relationship between taxpayer and government. According to James, Murphy and Reinhart (2005), tax laws cannot cope with every eventuality and has to be supplemented with administrative procedures and decisions and just as importantly, in order to work, it has to have a reasonable degree of willing compliance on the part of the taxpayers themselves.
Therefore, a more appropriate definition of compliance could include the degree of willingness with tax laws and administration that can be achieved without the immediate threat or actual application of enforcement activity. Tax compliance may be viewed in terms of tax avoidance and evasion. The two are conventionally distinguished in terms of legality, with avoidance referring to legal measures to reduce tax liability and evasion as illegal measures. Compliance might therefore be better defined in terms of compliance with the spirit as well as the letter of the law (James, Murphy and Reinhart 2005).
Nigeria is governed by a Federal system and the government’s fiscal power is based on a three-tier tax structure divided among the Federal, State, and Local governments, each of which has different tax jurisdictions. The Nigerian tax system is lopsided. The federal government controls all the major sources of revenue like import and excise duties, mining rents and royalties, petroleum profit tax and company income tax, value added tax among other revenue sources. State and local government taxes are minimal, hence, this limits their ability to raise independent revenue and so they depend solely on allocation from Federation Account.
In 1992, the government introduced self assessment scheme, under which a taxpayer is expected to fill a tax assessment form to determine his taxable income. Here, the intrinsic motivation to pay tax (that is, tax morale) will determine the level of compliance with reporting requirements. Which means that the taxpayer files all required tax returns at the proper time and that the returns accurately report tax liability in accordance with the law. The advent of democratic rule in 1999 has put greater pressure on the three-tier of governments to generate enough revenue and meet electoral promises in terms of provision of basic necessities and infrastructure for the economic empowerment of the people. To achieve these goals taxpayers must pay their taxes willingly as and when due. In other words, a high tax morale is required from the taxpayer in order to achieve a high degree of tax compliance.
Webley et al. (1991), detect a positive relationship between government performance and tax compliance But in spite of all the researches that have been done, more empirical work is needed to confirm the existence of these relationships and to measure the strength of their influence on tax compliance. This is particularly so, since tax compliance is of obvious importance for most countries. This work aims to study tax compliance in Nigeria, thereby supplementing empirical research on this important international problem. This is therefore an opportunity to take a stroll through theoretical and empirical findings in the tax morale literature, focusing on Personal Income tax morale.
1.2 Statement of Research Problem
Low tax compliance is a matter of serious concern in many developing countries. This is because it limits the capacity of government to raise revenue for developmental purposes (Torgler, 2003). This implies that the higher the revenue, the more likely government will put in place developmental plans for the enhancement of the living standard of the people. This is because when people pay taxes more revenue accrues to the government. The major problem of this research therefore, is to determine the effect of tax morale on the taxpayer in compliance with tax policies of government as a useful avenue for revenue generation.
The more modern approach to tax compliance has benefited from many contributions from different disciplines. There is a range of factors that might influence taxpayer’s behavior. For instance, work in sociology has identified a number of relevant variables such as age, gender, race and culture. The role of individuals in the society and accepted norms of behavior have also shown to have a strong influence (Wenzel, 2002). Also Polinsky and Shavell (2000), present a survey of the economic theory of public enforcement of law, and emphasize the aspect of social norms, that can be seen as a general alternative to law enforcement in channeling individual behavior.
There are limits for a government to increase compliance using traditional policies such as audits and fines. Therefore, if the government can influence a norm, tax evasion can be reduced by policy activities. Most researchers on tax compliance for example, (Torgler, 2003), (McBarnet, 2003) and (Murphy and Harris, 2007). focused their attention on the Western World and some Asian countries. Socio-cultural factors are important components in the lives of a people and given the deep-rooted and pervasiveness of these in the Nigerian societies, there is a clear need for more empirical research on the factors involved in the decision making process regarding compliance, since a better understanding of these factors can give birth to strategies that improve compliance. It is therefore, the focus of this study to subject tax compliance to empirical analysis in the Nigerian context.
1.3 Objectives of the Study
The general objective of this study is to determine the effect of Tax Morale on the taxpayer in compliance with tax policies of government in Nigeria. In doing so, it seeks to:
- Determine the extent of tax morale on the tax payer and its effect on tax compliance.
- Ascertain the effect of trust in government on tax compliance.
- Examine the effect of Nigerian Traditional Institution on tax morale of tax payers.
- Determine the effect of cultural norms on the tax payers’ morale.
- Ascertain the tax payer’s confidence in the legal system on tax morale.
1.4 Research Questions
This study is an effort at understanding the effect of tax morale on tax compliance in the Nigerian context. Therefore, the study is hinged on the following questions;
- What is the effect of tax morale on taxpayer’s compliance?
- Will trust in government affect tax compliance?
- To what extent has confidence in the legal system affect tax compliance?
- What is the relationship between Traditional Institution and tax morale?
- To what extent has social norms affect tax morale?
Hypotheses are assumptions on which a researcher bases his investigation and on the basis of which a confirmation of the assumed conditions are tested and validated. The hypothesis on which this research study is based are stated in null form as follows:
- Hο; Tax Morale has no significant effect on tax payer compliance.
- Ho; There is no significant relationship between trust in government and tax compliance.
- Ho; There is no significant relationship between the Nigerian Traditional Institution and tax compliance.
- Ho; There is no significant relationship between taxpayers cultural norms and the extent of their tax compliance
- Ho; There is no significant relationship between the tax payers’ confidence in the legal system and tax compliance.
1.6 Significance of Study
1.6.1 Theoretical Significance
The deterrence doctrine can be traced back to the classical works of Jeremy Bentham and Cesare (Murphy,2008). Their classical utility theory of crime is that people are rational actors who behave in a manner that will maximize their expected utility. Becker (1968) argued that authorities needed to and appropriately balance between detection of non-compliers and sanctions to the point where non-compliance becomes irrational.
In the early 1970s, Alligham and Sandmo (1972) extended Becker’s work on the economics of crime to the taxation context. They examined taxpayers’ decision to evade taxes when they were
filling out their tax returns and examined the relationship between penalty rate for tax evasion at the time, the probability of detection, and degree of tax evasion engaged in. What they found was that there was a relationship between these variables; with a higher penalty rate and probability of detection deterring individuals from evading their taxes. In the 1980s, therefore, many scholars began to question the value of deterrence alone in regulating behavior. They began to focus their attention on researching compliance rather than deterrence and began to realize the importance of persuasion and cooperation as a regulatory tool for gaining compliance. In fact, research has shown that the use of threat and legal coercion, particularly when perceived as illegitimate, can produce negative behavior; these actions are more likely to result in further non-compliance (Murphy and Harris 2007), creative compliance (McBarnet 2003), criminal behavior or opposition (Fehr and Rokenbach 2003).
According to Kagan and Scholz (1984), unreasonable behavior like disrespect for citizens, arbitrary refusal to take their concerns into consideration by regulators during enforcement generates resistance to compliance. Tyler (2006) argues that if regulators are prepared to first engage in dialogue and fair treatment with those they regulate, then, this will serve to encourage support for the law. Most research works in this area of study have focused on Western world and some Asian countries; therefore, the significance of this study lies in the fact that it will provide a framework for inter-state comparison between nations of the world. Moreover, our findings and conclusion will form a basis for further research work.
1.6.2 Practical Significance
With the current effort at social and economic development by Third World countries, a study like this is significant, as it is capable of contributing to the present knowledge in the area of interaction between socio-cultural factors and tax compliance, which may be in terms of consequences for policy issues and development programmes.
1.6.3 Operational Significance
Tyler (1997) has specifically shown that people value respective treatment by authorities and view those authorities that treat them with respect as more entitled to be obeyed. The operational significance of this study therefore, lies in the fact that; tax authorities will tend to be more oriented towards seeking result, through cooperation rather than by coercion alone, and prefer to see themselves as service providers rather than as strict law enforcers.
1.7 Scope and Limitation of Study
This study evaluates the effect of tax morale on tax evasion, tax avoidance and tax compliance in Nigeria. The study however, is limited to the study of organizations in the public, private and informal sectors of the Nigerian economy. These organizations are selected because they are duly registered with the Federal Inland Revenue Service and the Lagos State Internal Revenue Service for Pay As You Earn (PAYE). Also from the notes to their audited accounts, there has never been any negative report regarding tax evasion or tax avoidance. The limitation of this study, however, is in the area of methodological constraints in terms of which type of analytical technique is most appropriate for the work. In addition, because of funds and time constraint, the work is further limited to the selected organizations.
1.8 Summary of Research Methodology
The study adopted survey research design for data collection through standardized questionnaires administered to respondents. The population for this study comprised anybody of eighteen (18) years and above who is in employment (both in the private and public) sectors of Nigerian economy. Six organizations in the public, private and informal sectors formed the sample size of this study. Furthermore, a total number of 100 questionnaires were administered in each of the six public and private organizations. The nominal as well as the 7-point Likert Scale was employed in the study.
The data collected allow for measuring tax compliance as dependent variable and to search for factors that shape tax morale. Survey provides a good source of information about tax morale. The main advantage is that they include many socio-economic, demographic and attitudinal variables, thus, in a multivariate analysis; we can analyze what shape tax compliance using the multiple linear regression model. But it should be noted that surveys can be biased if they do not cover a representative share of the population. In other words, a high response rate is required. The sensitive nature of compliance information might discourage participation in such a survey, therefore, to reduce this problem, this study covered a broad variety of questions on different topics. Furthermore, the way we describe tax morale is less sensitive compared to a question asking whether a person has evaded taxes or not. Hence, we expect a higher degree of honesty in the answers to these questions.
1.9 Sources of Data
The study made use of primary source for data collection through standardized questionnaire administered to respondents and literatures. Questionnaire was administered to the respondents because of its advantage. It enables vital information, which cannot be obtained from written records to be at the disposal of the researcher. This is because in a questionnaire, the respondent’s anonymity is assured.
1.10 Operational Definition of Term
Tax is an imposed levy by the government against the income, profit, property, wealth and consumption of individuals and corporate organizations.
Tax evasion is a deliberate act on the part of taxpayer not to pay tax due.
Tax avoidance is a way of identifying the loop-hole in the tax law and then taking advantage of such a loop-hole to reduce the tax payable.
Tax avoision is a situation where the tax law might be unclear, thereby, confusing taxpayer as to the correct tax payable.
Tax Morale is the intrinsic motivation to pay tax.
Willingness to pay taxes without threat or coercion
A set of behavioural models and rules or standard of behaviour shared by members of a social group.
Are behavior patterns that are typical of specific groups.
A system for interpreting and enforcing the laws
A legal system for assessing and collecting taxes
Summary of Findings Conclusion and Recommendations
Chapter five proceeds as follows:
- Chapter 5:1 summarizes the theoretical findings;
- Chapter 5:2 presents the empirical findings;
- Chapter 5:3 provides the conclusion;
- Chapter 5:4 presents the recommendations; while
- Chapter 5:5 is all about suggestions for further study.
5.1 Summary of Theoretical Findings
According to the traditional model of tax compliance by Allingham and Sandmo, taxpayers choose how much income to report on their tax by solving a standard expected utility maximization problem that trade off the tax savings from underreporting true income against the risk of audit and penalties for detected non-compliance. In this framework, threat of penalty and audit influence people to pay their taxes (Allingham and Sandmo, 1972).
Tax morale is defined as the “intrinsic motivation to pay taxes”. Torgler (2002) and Fred (2003) stress its relevance to understand the high-observed level of compliance. Three key factors are important in understanding tax morale: moral rule and sentiments, fairness and the relationship with government. According to James, Murphy and Reinhart (2005), tax laws cannot cope with every eventuality and have to be supplemented with administrative procedures and decisions and just as importantly, in order to work, it has to have a reasonable degree of willing compliance on the part of the taxpayers themselves.
Tax compliance may be seen in terms of tax avoidance and evasion. The two are conventionally distinguished in terms of legality, with avoidance referring to legal measures to reduce tax liability and evasion as illegal measures. Compliance might therefore be better defined in terms of compliance with the spirit as well as the letter of the law (James, Murphy and Reinhart 2005).
The shared conviction of how people ought to behave is part of a society’s social norms, therefore, it means that individuals will comply and pay taxes as long as they believe that compliance is a social norm (Alm, McClelland and Schulze 1999).
According to James, Murphy and Reinhart (2005), “tax laws cannot cope with every eventuality and have to be supplemented with administrative procedures and decisions and just as importantly, in order to work, it has to have a reasonable degree of willing compliance on the part of the taxpayers themselves.” Therefore, a more appropriate definition could include the degree of compliance with tax laws and administration that can be achieved without the immediate threat or actual application of enforcement activity.
Tyler (1997) argues that understanding what people want in a legal procedure help to explain public dissatisfaction with the law and points towards directions of building public support for the law in the future. Therefore, taxpayers, when they are treated fairly and respectfully by the tax authorities, tend to cooperate better. Another perspective admits the relationship between the taxpayer and the government, where elements such as government performance, public goods, the impact of public expenditure, and the taxpayer’s internal motivation affect tax compliance decisions. Taxpayers will refuse to pay their taxes if they feel that the government is wasting their money. Looking to connect the performance of the government with the satisfaction of the taxpayer, Cowell and Gordon (1988) link the two sides of the government budget, income and expenditure, by introducing public goods.
In a study of Australian taxpayers, Wenzel (2002) also studied the impact of justice perceptions, but this time on self-reported tax compliance. Using a survey methodology, Wenzel found that the taxpayers were more compliant when they thought that they had been treated fairly and respectably. If individuals trust the motives of authorities, feel that they behave neutrally, and feel treated with respect and dignity, it appears they will be more willing to cooperate with the authorities and obey their decisions.
Richardson, (2006) found complexity to be another important determinant of tax morale. He concluded in his study that, the lower the level of complexity and the higher the level of general education, the higher is the level of tax morale
5.2 Summary of Empirical Finding
The study covered the interactions between tax morale on one-hand and predictor variables (social norms, attitude towards government, attitude towards tax evasion, tax avoidance, legal system, tax compliance and attitude towards traditional institutions) on the other hand. The main objective of the study was to determine the effect of tax morale on the taxpayer in compliance to tax policies of government in Nigeria. Survey design was used with questionnaire as the major tool of data collection. Questionnaires were administered to 600 randomly selected respondents and 50% of these returned their questionnaires.
As can be observed from Table 4.3.4, the p-value of f-test is statistically significant, which means with a p-value of zero to three decimal places, the model 1 is statistically significant. The R-square in table 4.3.3 is .212, this means that, approximately 21% of the variability of tax morale (TMOR) is accounted for by the variables in the model. The adjusted R-square as showing in table 4.3.3 indicates that 20% of the variability of tax morale (TMOR) is accounted for by the model, even after taking into account the number of predictor variables in the model.
Table 4.3.9 shows the result of model 2. From the table the p-value of F-test is statistically significant, which means with a p-value of .001, the model is statistically significant. The R-square in table 4.3.8 is .035; this means that approximately 4% of the variability of tax compliance is accounted for by variable in the model. Table 4.3.11 shows the (2-tailed) correlations among the variables in the regression model 1. Observation from this table shows that there are a number of significant correlations between tax compliance and tax morale, trust in government, tax evasion and trust in legal system. However, insignificant correlations are found between tax compliance and social norms, tax avoidance and traditional institutions. In this study, all the predictors were found to have varying degrees of predictive power on the criterion variables.
While tax morale has been an academic research topic in most developed countries, there has not been detailed consideration of the major determinants of tax morale in Nigeria. This is a pioneer study on tax morale and tax compliance in Nigeria. Also for the first time in the study of tax morale this work analyzes the effect of traditional institutions (monarch) on tax morale. Our empirical findings indicate that social norms, attitude towards government, tax evasion and tax avoidance have significant effect on tax morale. On the other hand, there is no significant effect of attitude towards legal system and traditional institutions on tax morale. We also established a significant positive effect of tax morale on tax compliance.
This study can be seen as one that incorporates non-economic factors into the economic analysis of tax compliance. Tax compliance is not just a function of opportunity, tax rates, probability of detection and so on but of each individual’s willingness to comply shaped by tax morale. This means that if tax morale is high, tax compliance will be relatively high.
Tax payers may follow laws they know or trust to produce good results. But laws are not only chosen according to past experiences; they are also influenced by the attributions tax payers give to them (for example, fairness and efficiency). Putting into consideration that a society is heterogeneous, a person’s type plays an important role in determining which laws are followed and which are not. In general tax payers are more inclined to comply with the laws if the relationship between the tax paid and the performed government services is found to be equitable. Thus, government and tax administration’s strategy aimed at creating confidence in their credibility and their capacity is rewarded with higher tax morale.
This study has brought to the fore the imperative of tax morale in the achievement of high tax compliance. Based on the findings in this study, we hereby make recommendations that may guide programmes, policy formulation and implementation of government that seek to increase tax payers level of tax compliance.
- If taxpayers do not understand what their obligations are, any intervention to enforce compliance will be perceived as unfair. Thus, there is a need to provide strong taxpayer’s services particularly during the tax filing stage. This will include dissemination of information in order to enhance taxpayer compliance and also introduce taxpayer education programmes. Taxpayer’s service can also be improved by: providing proper guidance on how the tax return forms are to be completed correctly, introducing automated systems to record and answer tax payers’ queries and wider use of the mass media to publicize important tax deadlines and so on.
- The capability to detect fraud or evasion is crucial to tax compliance. As it would not be practical to audit all cases, the fear of being caught would be sufficient to act as a deterrent. Ideally, when a case is selected for audit a tax official will be required to visit the premises of the taxpayer. The tax returns will have to be scrutinized under the supervision, or be jointly examined with a senior tax official so that the discretionary powers being exercised by tax officials are not abused. The tax authorities should undertake criminal prosecution in respect of cases involving fraud or evasion, and where appropriate publish the names of tax evaders which will act as a deterrent
- It is very important to educate the young (who are the next generation of taxpayers) on the significance and role of taxes. There is need to create an environment for tax education in schools through the establishment of councils for promotion of tax education. Tax education should be viewed in the medium and long-term perspectives, and as a means to enhance taxpayer consciousness. It would be more appropriate to target students in secondary and tertiary institutions. The overall effort should involve both the education and finance ministries in order to come up with an effective tax education curriculum.
- The monarchs (Obi, Oba and Emir) are very close to the people they rule over. The tax authorities should therefore maintain close relationship with the monarch and explore such relationship to bring more people into the tax net and also increase the level of taxpayer’s compliance. Town hall meeting should be encouraged and through this, the general public can more fully understand taxation issues, changes in the law, filing obligations and so on.
- Tax officials should be exposed to adequate and continuous training; both at home and abroad, for a better understanding of recent domestic and international tax issues, which could then be utilized, to formulate successful tax compliance strategies. The working conditions of tax officials also need to be improved in order to motivate them to carry out their duties in a more efficient and professional manner.
5.5 Suggestions for Further Study
This study can be seen as an attempt to incorporate non-economic factors into the economic analysis of tax compliance. Tax compliance is not just a function of opportunity, tax rates, probability of detection and so on but of each individual’s willingness to comply shaped by tax morale. This means that if tax morale is favorable tax compliance will be relatively high. This survey has shown that for future analysis of tax morale it can be fruitful to work with a model systematically integrating ideas borrowed from other social sciences. Putting into account that a society is heterogeneous, a person’s type plays an important role in determining which rules are followed and which are not. In general, taxpayers are more inclined to comply with the laws if the relation between the paid tax and the performed government services is found to be equitable. Our empirical analysis of tax morale is strongly based on attitude questions. Future research could try to get data on institutions based on objective criteria and connect it to tax morale. Also more tax morale indicators and more surveys are necessary. Future research on tax morale might consider fairness, complexity of tax laws, tax rates, and attitude of tax practitioners, as potential tax morale determinants for a more robust result.
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