Tax Knowledge, Tax Attitude, And Perception Of Tax Fairness As Predictors Of Tax Compliance Among Income Earners

Project and Seminar Material for Psychology

Tax Knowledge, Tax Attitude, And Perception Of Tax Fairness As Predictors Of Tax Compliance Among Income Earners


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 too 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.


1.6 Limitations of the Study

The demanding schedule of respondents at work made it very difficult getting the respondents to participate in the survey. As a result, retrieving copies of questionnaire in timely fashion was very challenging. Also, the researcher is a student and therefore has limited time as well as resources in covering extensive literature available in conducting this research. Information provided by the researcher may not hold true for all businesses or organizations but is restricted to the selected organization used as a study in this research especially in the locality where this study is being conducted. Finally, the researcher is restricted only to the evidence provided by the participants in the research and therefore cannot determine the reliability and accuracy of the information provided.

Financial Constraint:

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time Constraint:

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.


1.7 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 too 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.


Chapter Five


Conclusion and Recommendation

5.1 Conclusion

Taxes at the level that we now see have a significant impact on all of us individually. They also affect the economy’s aggregate performance and the ability of government to spend on essential public services. Whatever the total level of taxation and public spending, it is better if the government ensures that the tax system is designed to do least harm to the productive potential of the economy and to economic welfare more generally, and that the system is viewed as fair. But governments find it difficult to carry out tax policy in a consistent way. Unlike the economic ideal that we have discussed throughout this volume, tax policy is created in a political process with much concern for how it plays on the evening news and ultimately at the ballot box. Given the potential for the distortion of policy through this, there are some genuinely encouraging aspects of tax policy over the past 30 years. The taxation of savings and of mortgages, and some elements of corporate taxation, have improved over time, and some work incentive issues have been improved through theexpansion of in-work support for low earners, and indeed by cuts in the very high-top rates of income tax that existed in the 1970s. But the picture is not all good.

Governments have frequently set about increasing taxes not where they are least economically damaging, but where they are least transparent or most transiently popular. This has led to mistakes which later required rectification (which itself created political tensions). Often, poor economics ultimately becomes poor politics. Governments also, understandably, shy away from making tough decisions, postponing pain, which on occasion stores up much greater problems in future. The facts that we still pay a tax based on the value of our houses in 1990s and that we still have two separate systems of income taxation are both products of failure to tackle politically difficult anomalies in the tax system.


5.2 Recommendations

  1. Fix the international tax system and limit provisions that facilitate corporate avoidance and income shifting
  2. Change the taxation of capital to promote more uniform taxation
  3. Reduce distortionary tax preferences in the individual tax code.
  4. Encourage working-age Americans to enter the labor force and supply more labor.

Tax Knowledge, Tax Attitude, And Perception Of Tax Fairness As Predictors Of Tax Compliance Among Income Earners


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