An Empirical Study of Economic and Behavioural Determinants of Tax Compliance
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Chapter one on An Empirical Study of Economic and Behavioural Determinants of Tax Compliance
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.
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.
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.
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?
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.
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.
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.
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.
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.
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