An Empirical Study Of Economic And Behavioural Determinants Of Tax Compliance In Anambra State

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An Empirical Study Of Economic And Behavioural Determinants Of Tax Compliance In Anambra State


Abstract


A number of factors may be responsible for low compliance in income tax administration in Nigeria. However, taxpayers’ attitude has been identified as one factor that play important role in influencing tax compliance behavior. Besides, the influence of taxpayers’ attitude on compliance behavior may be moderated by financial condition and risk preference. This study investigated the moderating effect of financial condition and risk preference on relationship between taxpayers’ attitude and compliance behavior. 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 behavior. 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 behavior.


Chapter One


1.0 Introduction

1.1 Background of the Study

Tax is a major source of government revenue in any planned economic system. However, the extent to which taxpayers comply with the stipulated tax laws, thereby avoiding the need for aggressive tax planning by the government by reducing the level of recorded tax avoidance and evasion attempts, is an important factor in determining this source of revenue flow to the government. As at present no economy has recorded a hundred per cent compliance to her tax system. Hamm (1995) noted that of 117 million Income tax forms returned in April, 1995, 8.3 per cent had not accurately, declared their tax liabilities. In addition to this, approximately 7 million or 5.6 per cent did not return the income tax form.

According to Singh (2003) tax compliance is a person’s act of filling the income form, declaring all taxable income, accurately and disbursing all payable taxes within the stipulated period without having to wait for follow-up actions froth the authority. Franzoni (2000, cited in BATRANCEA et al., 2012) highlights four basic rules a taxpayer should follow in order to be fully compliant with the tax law: (1) report the real tax base to the tax authorities; (2) compute correctly the tax liability; (3) file the tax return on time; and (4) pay the amounts due on time. If one of the rules is broken, the taxpayer becomes non-compliant


1.2 Statement of the Problem

The ability on any tax system to generate the needed revenue for government is a function of the behaviour of the taxpayers constituting individual elements of the tax system. The behaviour of the taxpayer is a result of his/her personal norms and experiences related to a specific context. The context is the social ad economic environment and the society in general and includes the activities of the revenue body and its interactions with taxpayers (OECD, 2010). Therefore, a change in these ‘context’ can change the behaviour of the taxpayer. This is because; drivers behind tax payers’ behaviour cannot be separated from context and to influence these ‘drivers’ means a change the context (OECD, 2010).

Thus, two basic approaches have been noted in the public policy literatures on determining the degree of tax compliance/non-compliance (James and Alley, 199). The first approach analyses compliance in terms of economic implications, which is based on the likely economic costs and incentives of compliance and non-compliant behaviour. This view is based on economic rationality and developed using economic analysis. The other approach examines the effects of other factors such as: age; gender; education; status and peer influence on compliance decisions, particularly as they relate to the tax payer or agencies charged with the administration of the tax system. This approach primarily deals with behavioural issues and draws heavily on concepts and researches from disciplines such as; psychology, sociology and anthropology.

These non-economic factors, which have been neglected by economists, have been introduced to explain the tax compliance by using the economic framework (Smith and Stalans, 1991). Braithwaite et al. (2003) examined such factors as the perception of justice and Feld and Frey (2007) suggested that taxpayers are prepared to comply with the tax system if they perceive the political process is fair and legitimate. The roles of individuals in society and accepted norms of behaviour have also been shown to have a strong influence (Wenzel 2004 and 2005). This all has links with the rapidly expanding literature on tax morale which might be defined as ‘an individual’s intrinsic willingness to pay taxes’ (Aim and Torgler, 2006) and which is examined further in Torgler (2007).

Background factors such as cultural influence have been examined by Coleman and Freeman (1997) and Cummings et al. (2004), and so have the implications of different political systems (Pommerehne et al., 1994). More direct contributions to policy in this area have come from a number of authors. For example, one is an appeal to taxpayers’ conscience (Hasseldine and Kaplan, 1992) and also to feelings of guilt and shame (Erard and Feinstein, 1994). Others have suggested more positive help for taxpayers (Hite, 1989) and different methods of achieving this — such as the use of television to change tax payers’ attitudes towards fairness and compliance (Roberts, 1994) and information campaigns about the public goods and services paid for by taxation (Leder, et al. 2010).

The studies are however inconsistent in their findings, while majority focus on the economic determinants of tax compliance behavior. It is against this backdrop that this study would attempt to explore both the behavioural and economic approaches to tax compliance.


1.3 Research Objectives

The general objective of this study is to examine whether a relationship exists between economic and, behavioural determinants on the tax compliance behaviour in Edo State. The specific objectives of this study include:

  1. To determine whether economic factors are significant determinants of tax compliance behaviour in Edo state.
  2. To determine whether behavioural factors are significant determinants of tax compliance behaviour in Edo state.

1.4 Research Questions

The following research questions were raised in this study:

  1. To what extent are economic factors significant determinants of tax compliance behaviour in Edo state?
  2. To what extent are behavioural factors significant determinants of tax compliance behaviour in Edo state?

1.5 Research Hypotheses

Hypothesis One
  • Ho: Economic factors are not significant determinants in explaining tax compliance behaviour in Edo state.
  • Hi: Economic factors are significant determinants in explaining tax compliance behaviour in Edo state.
Hypothesis Two
  • Ho: Behavioural factors are not ant determinants in explaining tax compliance behaviour in Edo state.
  • Hi: Behavioural factors are significant determinants in explaining tax compliance behaviour in Edo state.

1.6 Significance of the Study

The thrust of this study is to shift the attention from economic determinants of tax compliance behaviour to a behavioural focus. This emphasis of necessary, in that in the current context of our financial system where mostly direct sources of revenue are the most reliable source, understanding tax compliance behaviour from a behavioural approach would have a bilateral effect on the following category of persons.


1.7 Scope of the Study

The research is mainly based on the empirical study of economic and behavioural determinants of tax compliance. The area in which study was carried out is limited to Edo state.


1.8 Limitation of the Study

One of the major problems encountered by the researcher is the monetary problem. There was no sufficient money to make the purchasing of all necessary materials for the research work. There was also the problem of meeting some personalities to get information from them. Because of that, the researcher found it difficult to collect all the necessary information. However, the researcher made do with the resources available for her research work.


Chapter Five


Summary of Findings, Conclusion and Recommendations

5.1 Summary of Findings

Based on the results of the empirical data analysis, the following findings were made:

  1. The non-tax compliance, costs and penalties were perceived by respondents as the most significant economic factor amounting to tax compliance in Anambra state. This had a mean score of 4.6285.
  2. The present tax rates were also identified by respondents as significant to tax compliance in Anambra state, this as indicated by question 4 was because the rates had a progressive effect on the income of the tax payer.
  3. The most significant behavioural factor was the perceived accountability of the tax officials by respondents, with a mean score of 4.2539. This is because people are psychologically more inclined to tax compliance when the have a feeling of trustworthiness of the tax collectors.
  4. Also notably another prevalent behavioural factor which mostly the entrepreneurs identified was the perceived fairness of the tax system; a system perceived being equitable would thus have a resulting effect on tax compliance.

5.2 Conclusion

The ultimate objective of any tax authority is to collect all taxes and duties payable in accordance with the law and in such a manner that will sustain confidence in the tax system. The actions of taxpayers whether due to ignorance, carelessness, recklessness, or deliberate invasion as well as weakness in a tax administration means that instances of failure to comply fully with the law are inevitable.


5.3 Recommendations

Based on the findings, the following policy recommendations are therefore suggested:

1. A Review of Economic Impedimets to Tax System:

A more equitable system of tax giving rise to fair play in the tax administration process would significantly improve the level of tax compliance in the country. A system which is adjudged as inequitable because the high income earners pay less when compared with mid to low income earners would significantly deter tax compliance in the nation. A taxpayers seek avoidance measures in order to escape the menace of the tax system. More so less stringent and penalties should be meted to defaulting tax payers, at least pending the identification of the factor leading to the default. Since, majority of taxpayers seem to exhibit at least some evidence that they are responsive to social and other cultural values, such as: peer influence (a case common n the informal sector — where business colleague fails as a result of neighbor non-compliance). The danger of this is that unnecessary application of penalties in this case would undermine compliance behaviour and provoke taxpayer resistance on the part of otherwise responsible citizens. This can be reduced by adopting the following measures:

  • Public education and enlightenment programs: This should be done through mediums such as: billboards and electronic Medias.
  • Setting up arbitration courts to deal with issues of non compliance more formally.
2. Behavioural Inclinations:

Behavioural inclinations to tax compliance are linked to profound reforms in the public sector. In this sense, the perceived positivity of factors such as: accountability of tax personnel’s, equitable tax administration process, etc. would boost the psychological perception the taxpayer with a resulting change in attitudes among citizens. This can be achieved through:

  • The provision of yearly, monthly or quarterly reports. of generated tax revenues, its sources and applications.
  • Enforcement of government regulations through agencies such as: Federal Board of Internal Revenue and the State Board of Internal Revenue to govern tax compliance in line with duly established formal rules of public policy.

There is the general tendency for taxpayers’ compliance when they perceive a penalty or fine for non compliance. The degree to which the implementation of this measure as a deterrent tool for tax compliance would be useful depends on perceived factors such as: accurateness of governmental records, prompt visit of tax officials. If taxpayers feel that they can safely evade the tax, there generally would be a low level of compliance.

Granting Tax Concessions:

The provision of certain tax incentives such as low tax rate, tax holiday, and investment tax credit to would go a long way in motivating citizens to pay tax.

3. A General Atmosphere of Harmony:

To improve tax compliance, it is necessary to cultivate a culture of harmony among tax payers and tax authorities. This could be done by establishing a tax payer friendly environment and policies and by appreciating their contribution to national development and progress.


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