TAX KNOWLEDGE, TAX ATTITUDE, AND PERCEPTION OF TAX FAIRNESS AS PREDICTORS OF TAX COMPLIANCE AMONG INCOME EARNERS IN LAGOS STATE


Content

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....................................................................................    

          Tax attitude and tax compliance............................................................    

          Perception of tax fairness and tax compliance.....................................    

          Tax knowledge and tax compliance....................................................       

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..............................................................................    

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

          Summary of findings.................................................................       …..  

5.1:    Implication of the findings........................................................        ……

5.2:    Suggestions for future studies....................................................       ….. 

5.3:    Recommendations.......................................................................      ….. 

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 noneconomic 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.

 

1.7     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 selfreported 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 selfreported tax evasion, but are insignificant predictors of actual behaviour. However, the correlations between selfreported tax noncompliance 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.

 

Tax Attitude

Perception of fairness

Tax Knowledge

TAX COMPLIANCE

 

 

 

 

 

 

 

 

 

 

 

 


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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