TAX KNOWLEDGE, TAX ATTITUDE, AND PERCEPTION OF TAX FAIRNESS (TAX JUSTICE) AS PREDICTORS OF TAX COMPLIANCE AMONG INCOME EARNERS
CHAPTER ONE
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
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 INTRODUCTION
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 self‐reported 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 self‐reported tax evasion, but are insignificant predictors of actual behaviour. However, the correlations between self‐reported tax non‐compliance 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.
Perception of fairness and tax compliance
Fairness represents the equity of the exchange with the government and the equity of the taxpayer’s burden vis-à-vis other taxpayer’s burden. It relates to the perceived balance of taxes paid and public goods received, and to the perceived justice of procedures and penalties of breaking the norms (Wenzel, 2003). In the context of tax behaviour, perceived fairness can be expressed in the form of distributive justice, procedural justice and retributive justice. Distributive justice refers to a fair exchange of resources, benefits and costs. Fairness consideration assumes comparing contributions and benefits, as well as how the taxpayer feels he is treated relative to others (Kirchler, Kogler and Muchlbacher, 2014). Distributive justice is further classified into three groups: horizontal, vertical and exchange fairness. Horizontal fairness refers to a situation where there is a fair distribution of benefits and costs to people of the same income group. On the other hand, vertical fairness provides for the distribution of benefits and costs among people of unequal situation (for example, people that earn more income and people that earn less income). Similarly, exchange fairness refers to the relationship between a taxpayer’s burden and the provision of public goods and services by the government. It is argued that the taxpayer will not be willing to comply with tax laws if there is perceived imbalance between the tax contribution and the provision of public goods and services (Porcano cited in Hofmann, Hoelzl and Kirchler, 2008). Exchange with government requires that taxpayers’ behaviour should be influenced by the benefits received (Tan and ChinFatt, 2000, Leder, Mannetti, Holzl and Kirchler 2010). The procedural justice form of perceived fairness assumes that the process of tax collection is linked to resource distribution. When authorities enact procedures in a fair manner, members of the tax group are more likely to voluntarily comply with their decisions (Tyler 2006, Cropanzano, Rupp, Mohier and Schminke, 2001, Chung and Trevidi, 2003, Saad 2014, Kim 2002). The perceived fairness used in making allocation decisions is assumed to be more fair when followers have freedom to voice their opinion on the decisions of the relevant authorities and when authorities take decisions accurately and not because of self-interest (deCremer 2004, Magner, Johnson, Sobery and Welker, 2000). It is assumed that fair treatment of taxpayer and the norm of mutual understanding between the taxpayer and tax authority will improve confidence in the tax authority.
CHAPTER THREE
RESEARCH METHODOLOGY
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Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought TAX KNOWLEDGE, TAX ATTITUDE, AND PERCEPTION OF TAX FAIRNESS(Tax Justice) AS PREDICTORS OF TAX COMPLIANCE AMONG INCOME EARNERS
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
4.1 Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
DATA ANALYSIS
The data collected from the respondents were analyzed in tabular form with simple percentage for easy understanding.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Introduction
It is important to ascertain that the objective of this study was to ascertain TAX KNOWLEDGE, TAX ATTITUDE, AND PERCEPTION OF TAX FAIRNESS(Tax Justice) AS PREDICTORS OF TAX COMPLIANCE AMONG INCOME EARNERS. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of the TAX KNOWLEDGE, TAX ATTITUDE, AND PERCEPTION OF TAX FAIRNESS (Tax Justice) AS PREDICTORS OF TAX COMPLIANCE AMONG INCOME EARNERS
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Summary
This study was on TAX KNOWLEDGE, TAX ATTITUDE, AND PERCEPTION OF TAX FAIRNESS(Tax Justice) AS PREDICTORS OF TAX COMPLIANCE AMONG INCOME EARNERS. Three objectives were raised which included: To determine the relationship between tax attitude and tax compliance among Lagos tax payers, to determine the relationship between perception of tax fairness and tax compliance among Lagos tax payers and to investigate the relationship between tax knowledge and tax compliance among Lagos tax payers. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of selected SMES in Lagos. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, managers and marketers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
The foregoing results indicate the need to adopt the persuasive approach in improving income tax compliance behaviour in Lagos state. The persuasive approach recognizes the influence of fairness tax structure and government spending on tax compliance behaviour. While tax compliance literature prominently recognizes deterrent approach as the major way of reducing non compliance, this study provides evidence indicating that persuasive approach can be used to improve personal income tax compliance behaviour as well. This position is supported by Richardson (2005) and Chan et al (2000). The persuasive approach allows the taxpayer to contribute in the process of making decisions. By giving voice in the decision process, tax payers judge such procedures as more fair (Magner, Johnson, Sobery and Welker (2000). Based on these findings, it is evident that the perception of tax fairness influences personal income tax compliance behaviour
Recommendation
Accordingly, it recommended that further study should be conducted to accommodate the identified issues.
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