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A review Factors Affecting Tax Compliance

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 J. Equity Sci. & Sust. Dev.

Journal of Equity in Science and Sustainable Development

Vol. 3(2):1-15
Article Number: JESSD30.9.2018
ISSN 2523-1901(Online)
Copyright © 2019
URL: http://jessd.mwu.edu.et/index.php/jessd
Email: [email protected]
A review
Factors Affecting Tax Compliance

Mohammedhussen Mama

Department of Management, College of Business and Economics of Madda Walabu University

Received September 30, 2018 Accepted February 29, 2019 Published June, 2019
Abstract
The purpose of this paper is to go through previous studies in order to bring into light those
factors affecting tax compliance so as to help interested individuals and institutions get
necessary information to create a model which shows important factors that influence decisions
about tax compliance in their area of interest. In order to do this the researcher employed the
review of literature as the method of this study. Tax compliance has been studied in economics
by analysing the individual decision of a representative person between paying taxes and
evading taxes. In the research of tax compliance many empirical studies have been done that
emphasized the impact of a wide variety of potential determinants of voluntary compliance with
individual income/profit tax filing and reporting obligations. The review of literature identified
that the most important determinants identified are: economic factors as the level of income,
audit probabilities, tax audit, tax rate, tax benefits, penalties, fines, complexity of tax system.
and other non‐economic factors as attitudes toward taxes, personal, social and national norms,
perceived fairness, tax morale, perception of government accountability, tax information and
perception of public service.

Key Words: Tax, Tax compliance, Economic Factors, Non Economic factors.
Corresponding author Email: [email protected]
Author agrees this article remain permanently open access

Introduction enforcement efforts such as audit; probability of

Many factors are known to affect tax detection; difference across ‐ culture; perceived
compliance. Those factors which influence tax behavioural control (Furnharn, 1983); ethics or
compliance behaviour are differing from one morality of the taxpayer and tax collector;
country to another and also from one individual equity of the tax systems; demographic factors
to another (Kirchler, 2007). Different scholars such as sex, age, education and size of income
present different factors affecting tax (Murphy, 2004).
compliance: ‘’taxpayers perceptions of the tax
system and Revenue Authority’’ (Ambrecht, According to Kirchler (2007), tax compliance
1998); peer attitude or subjective norms; considered as a major research area in
taxpayers’ understanding of the tax system or economic psychology. Tax compliance has
tax laws (Silvani, 1992); motivation as rewards been seen from various viewpoints shedding
(Feld, Frey and Targler, 2006) and punishment light on different aspects of taxpayers’
such as penalties (Allingham and Sandmo, behaviour. Attitudes were measured, prevailing
1972); cost of compliance (Slemrod, 1992); social norms and lay theories explored, which

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 Mama, 2019

people have in mind in fulfilling their annual tax Tax Compliance

declarations. The perception of taxpayers that According to James and Alley (2002) tax
they are receiving some benefits from a public compliance refers to the willingness of
goods funded by the tax they pay increases tax individuals to act in accordance with in both the
compliance. Surprisingly, punishments appear ‘spirit’ and the ‘letter’ of the tax law and
to have insignificant effect on tax compliance administration without the application of
behaviour (Alm et al., 1992). In fact, some of enforcement activity’’. Roth et al. (1989)
the standard instruments such as greater defined tax compliance as ‘’filing all required
penalties may be largely ineffective in tax returns at the proper time and that returns
increasing tax compliance. accurately report tax liability in accordance with
the tax law applicable at the time the return is
The policies which were oriented towards filed’’.
punishment were used to explain the behaviour
of tax compliance in the past many years (Alm, According to Richardson (2005), the findings
et al., 1992). Surprisingly, the theoretical from a cross cultural study between Hong Kong
approach failed to completely explain the and Australia indicated that Australian
behaviour of tax compliance. Non‐economic taxpayers were generally more compliant than
factors, which had been neglected by the Hong Kong taxpayers. Bobek et al. (2003),
economists, have been introduced to explain on the other hand, used a hypothetical tax
the tax compliance by using the economic scenario in their experimental study to
framework (Smith and Stalans, 1991). Non investigate the taxpayers’ noncompliance
economic factors such as the willingness to pay behaviour in the US, Australia and Singapore.
for public provision, public education, and tax Results indicated that Singaporean taxpayers
morale were considered (Hyun, 2005). These had the lowest noncompliance rate at almost
show that government must use a range of 26 percent, while Australian taxpayers had the
approaches in its efforts to promote tax highest at 45 percent. The findings further
compliance as suggested by Alm et al. (1992). suggested that complete compliance was
highest in Singapore (54 percent) and lowest in
This study provided an overview of the Australia (30 percent). The US was in the
economic and non‐economic factors affecting middle in terms of both the compliance and
tax compliance. The researcher attempted to noncompliance rates.
examine individual or corporate tax compliance.
The factors were brought into accessibility for Economic Factors of Tax Compliance
interested individuals and organization with the A number of economic factors have been
help of reviewing the existing literatures in considered important for explaining tax
detail as there is a belief that previous studies compliance:
were not exhaustive (Nicoleta, 2011). Based on
the factors reviewed the researcher proposed Type of Employment
variables that should be included in the current Self‐employed taxpayers have more
model for predicting tax compliance in Ethiopia opportunities for tax evasion and these
and elsewhere too. The factors are shown in opportunities might further increase with the
the Figure 1. After pooling of information from number of different income sources. Hence, in
different previous detail reviewed researches tax compliance decisions the level of income
as one can see from the next section onwards, might interact with its source. A different aspect
it was possible to crystallize the factors that of the income source, if income was earned by
have the most influence on tax compliance to hard work or an effortless job ‐ has been
suggest for interested institutions both private studied in experiments by (Kirchler et al, 2007).
and public ones to have appropriate model for According to Kirchler et al., (2007), taxpayers
tax compliance. are less compliant when they reported income
earned by low effort than when they reported

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J. Equity Sci. & Sust. Dev.

hard‐earned income. It seems that taxpayers rate increases without undermining taxpayers’
are reluctant to lose their hard‐earned money compliance (Kirchler et al., 2007).
by “gambling” with tax authorities. The issue is
important for designing proper audit strategies Regarding the source of income, Boylan and
and for tax ethics, since a negative relation of Sprinkle (2001) report that participants in their
income and compliance would put into question experiment reacted to a tax rate increase with
the intended or pretended distributional effects, lower compliance if they were endowed with
respectively of progressive income taxation income by the experimenters, but reacted with
(Lang et al., 1997). higher compliance to a tax rate increase if they
had to earn their income by performing in a
Tax Rate one‐hour multiplication exercise. Thus it is so
Economic models of rational compliance difficult to discuss the impact of tax rates on the
decisions provide either mixed predictions of level of tax compliance for achieving a
the effect of the marginal tax rate on comparative analysis (Hyun, 2005).
compliance, or predict that increased tax rates
would increase compliance (Allingham and The impact of the tax rate would depend on the
Sandmo, 1972). On the contrary, most degree of trust. When trust is low, a high tax
empirical research finds that higher tax rates rate could be seen as an unfair treatment of
decrease compliance or provides mixed results. taxpayers, as an attempt at taking from the
For instance, Pommerehne and taxpayers what is rightly theirs. When trust is
Weck‐Hannemann, (1996) demonstrate that high, the same level of tax rate would be
evasion increases with increasing marginal tax interpreted as contribution to the community,
rates. which in turn again profits each individual. In
the first case, the tax rate would be interpreted
A theoretical model for tax compliance shows as the wielding of power by some tax offices
that the tax rate has an ambiguous effect on and in the second case, as a joint agreement
the level of tax compliance, depending upon within the community (Kirchler et al., 2008).
taxpayer’s attitude toward risk. Furthermore,
there have been contradictory empirical Tax Audit
evidences on the effect of tax rate on the level Tax audit level can be obtained using two
of tax compliance. For instance, laboratory elements: the number of taxpayers selected for
experiments with different rates of taxes usually audit and how much intensive the audit is. The
found that an increase in tax rates leads to number of taxpayers is easily measured by the
higher evasions of tax (Alm et al, 1992). number of audited taxpayers divided by the
Surprisingly however, Alm, et al. (1995) the total number of taxpayers. However, the effort
opposite was found in a Spanish sample. to know how intensive the audit is tend to be
Moreover, Baldry (1987) did not find a difficult to measure due to no published
significant effect on any experiment. information about the process of tax audit.
Hence the level of tax audit is used practical
The other empirical studies on the impact of tax comparison purposes (Hyun, 2005). Tax audit
rates support the assumption that high tax generates administrative cost. As a constraint
burdens have negative impact on compliance of the fixed administration cost, an increase in
(Andreoni et al., 1998). In field studies, a similar the level of tax audit is required to decrease the
critique as in the discussion on income effects level of other administrative functions, like
can be made, i.e., opportunities for tax evasion taxpayer service, tax collection.
or avoidance and source of income are likely to
interact with tax rate (Kirchler et al., 2007).
Knowledge about effects could help authorities
in promoting changes in tax policy such as tax

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 Mama, 2019

Audit Probabilities In an experimental survey study by Kirchler et

Survey research by Mason and Calvin, (1978) al. (2007), pointed out that fines that are
concluded that evaders of taxes feel chances of income adjusted had more impact on tax
being caught lower compared to non evaders of compliance than fines solely adjusted to
taxes. Tax experiments show that tax severity of evasion. An increase in tax
compliance greatly decreases after an audit avoidance and tax resistance because of an
(Guala and Mittone, 2005) which is given the increase of fines indicate how fines should be
name “bomb‐crater” effect. Compliance considered in order to be effective though fines
increases after the first periods of should be high enough to decrease the
“bomb‐crater” effect. According to Kirchler, et expected value of tax evasion and to assure its
al. (2005) compliance rose after a deterrent effect on taxpayers.
“bomb‐crater” in an experiment faster to its
baseline in a high audit rate situation compared Penalty
to situation of lower audit rate. Penalty rates have been separately applied by
the different tax subjects like the individual
Tax audits are costly in practice and income tax, capital income tax, and value
researches change their focus towards added tax. Furthermore, the penalty rates for
alternative control mechanisms. For instance, each tax subject are differentiated by the
Reinganum and Wilde (1985), and Alm, et al. different types of evasion, like non‐filing, timely
(1993) came up with several alternative audit filing but under‐reporting, no bookkeeping of
against random audits schemes (Kirchler et al., invoices, receipts. Or, the penalty rates are
2007). They tested the effectiveness of a differently applied to the types of taxpayers
cut‐off rule (i.e., when the declaration falls depending upon their evaded behaviours. If
below a certain threshold), a retrospective audit some taxpayers had the intentional evasions,
scheme (i.e., when the random detection of the penalty rate is much higher than that of
noncompliance results in examination of unintentional evasions (Hyun, 2005). Two kinds
previous tax files), and a prospective audit of evaded behaviours are most common in
scheme (i.e., when the detection of analysis of tax compliance. They are timely
non‐compliance increases future audit filing but underreporting, and non‐filing.
probability). Similarly, the findings by Guala and Despite anecdotal evidence that penalties are
Mittone (Guala and Mittone, 2005; Mittone, important, empirical studies on the extent of
2006) contributed an cost effective audit their impact have not yet found a clear
system in which young and inexperienced correlation (Kirchler, 2007; Kirchler et. al.,
taxpayers are particularly audited to help them 2008.) Some studies have showed that
learn to be tax compliant if their first tax file is penalties have a larger impact on compliance
checked by authorities (Kirchler et al., 2007). than the probability of being audited (Fisher et.
al., 1992). Tax compliance also significantly
Fines increased with higher penalties but not with
The relation of fines and tax compliance shows audit probability in the study by Friedland, et al,
inconsistent findings (Fischer et al., 1992). (1978). In contrast, other studies have shown
Experiments show that fines are slightly higher that penalties are not related at all to
related to tax compliance than audit compliance; even though they were able to
probabilities do (Park and Hyun, 2003). Low confirm that the probability of being audited is
fines show that the authorities are weak to be related to compliance (Webley, et. al., 1991).
the controller of wrongdoers, undermining trust To explain this lack of a clear impact
among honest taxpayers. High fines erode the relationship,for instance, penalties that are too
perception of retributive justice and produce tax low could be perceived as an indicator that the
evaders who may try harder to regain “losses’” authorities are weak and unable to control non-
incurred during fines (Kirchler, 2008). compliant taxpayers, thereby undermining trust
among honest taxpayers and leading to a lack

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J. Equity Sci. & Sust. Dev.

of encouragement to comply with tax law. perception of government accountability, tax

Furthermore, penalties that are inappropriate knowledge and perception of public service.
because a taxpayer has made a mistake
resulting from vague or overly complex tax laws Attitudes toward Taxes
would weaken the perception of retributive Attitudes represent the positive and negative
justice and encourage tax evaders to try harder evaluations that an individual holds of objects.
to regain their losses incurred by those Positive attitude towards tax evasion render
penalties (Mohd, 2010). taxpayers non tax compliant. It is usually found
out that attitudes towards tax evasion are quite
Complexity of Tax System positive (Kirchler et al., 2008). Significant, but
Sophistication of tax laws makes tax system a weak relationship existed between attitudes
complex one (Richardson and Sawyer, 2001). and self‐reported tax evasion (Trivedi et al.,
American Institute of Certified Public 2004). The study conducted data gathered from
Accountants, (1992), pointed out that fined tax evaders and honest tax payers
computational complexity, forms complexity, showed that attitudes explain in part
compliance complexity, rule complexity are self‐reported tax evasion, though it is an
forms of tax complexity, procedural complexity insignificant predictor of actual behaviour. Here,
(Cox and Eger, 2006) and the low level of one can be confident that in general if tax
readability (Pau et al., 2007; Saw and Sawyer, attitudes become worse, tax evasion will
2010). increase (Lewis, 1982).

Research conducted in 45 countries by Kirchler et al., (2008) argue that positive

Richardson (2006) found that tax complexity is attitudes will contribute to trust in authorities
the most important factor affecting non- and hence will increase tax compliance. Tax
compliance which is consistent with the findings attitudes in general depend on the perceived
of Cox and Eger (2006) who found that use of the money collected and whether the
procedural tax complexity contributes to an authority uses the money for public purposes.
increase in tax non-compliance. A research
conducted by McKerchar (2005), Australia on a Personal, Social and National Norms
survey among tax agents noted that tax payers Norms are important determinants of tax
were not happy with the increasing complexity compliance. According to Kirchler et al., (2008),
of the tax law that the tax agents desired a norms are behavioural standards on three
much simpler tax law, with less regulatory different levels:
material and ad hoc change. Similar findings 1. The individual level;
were documented by Kirchler et al. (2006) that 2. The social level; and
taxpayers were more likely to comply when the 3. The national level
tax law was perceived as less complex.
On the individual level, norms define
Noneconomic Factors Affecting Tax internalized standards on how to behave. There
Compliance is considerable overlap between individual
There are many non‐economic factors to affect norms, values and tax ethics: the more
the level of tax compliance. Many studies have developed the moral reasoning or tax ethics,
been conducted to include the non‐economic the more likely is voluntary compliance (Trivedi
factors to explain the behaviour of tax et al., 2003). Norms are usually defined on the
compliance under the framework of economic social level as prevalence or acceptance of tax
analysis (Alm et al., 1995). Related to evasion among a reference group (Wenzel,
non‐economic factors for tax compliance, in 2005). The behaviour of reference groups, for
this paper consist of: attitudes toward taxes; example friends, acquaintances or vocational
personal, social and national norms and group are related to social norms. If taxpayers
perceived fairness of tax system, tax morale, believe that non‐compliance is widespread and

5
 Mama, 2019

approved behaviour in their reference group, trust (Job et al., 2007). From the retributive
they are likely to be non‐compliant as well. justice point of view, unreasonable audits and
unfair penalties lead to negative attitudes
On the level of national norms, norms become toward the tax office and taxes in general
cultural standards, often mirrored in the actual (Wenzel and Thielmann, 2006). Therefore, the
law. Several authors suggest that trust in perception that unfavourable retributive justice
political leadership and administration will lead exist leads to increased loss of trust. This
to voluntary tax compliance when favourable would increase tax non‐compliance.
national norms are established (Fjeldstad,
2004). In general, if the norms held by Tax Morale
taxpayers favour tax compliance, voluntary tax ‘‘The attitude of a group or the entire population
compliance will result. of taxpayers is the question of accomplishment
or ignorance of their tax duties” is the definition
Perceived Fairness of Tax System for Tax Morale. It is anchored to citizens’ Tax
Another factor that citizens most often attitude and in their perception to be citizens, is
communicate is referring to tax system fairness their inner acceptance of their Tax duty/liability
concerns (Taylor, 2003). There are three areas and acknowledgement of sovereignty of the
of fairness as in social psychology: state” (Schmoelders, 1960). A significant
impact on payment of taxes as well as on
1. Distributive justice, which refers to the avoidance thereof is one of the influencing
exchange of resources, both benefits factors of tax compliance. Tax morale is
and cost; defined as the collective attitudes of a group or
2. Procedural justice, which refers to the population to comply with tax law (Schmölders,
process of resource distribution; and 1960). Some authors further stated individuals
3. Retributive justice, which refers to the are not solely motivated by maximization of
perceived appropriateness of sanctions their own wellbeing but also by their feeling of
in the case of norm‐breaking (Kirchler responsibility towards the society (Orviska and
et al., 2008). Hudson, 2002) as it is found that the Tax
morale is linked to the motivational concept of
Distributive justices are compared on the basis civic duty.
of individual, the group, and the societal level. If
an individual’s tax burden is greater than other Literature is meant under tax morale is the
individuals with similar background, tax motivation of a person to pay taxes real
compliance is lower. Individuals want a fair characteristic of the person, which is like an
treatment of their group relative to other individual willingness or a moral obligation or a
(income) groups (Spicer and Lundstedt, 1976). belief and views in a social contribution as a
If groups have a perception that their tax result of paying the taxes. Tax morale is also
burden is bigger than similar group, the group interpreted as an understanding of the
tend to be non compliant (Juan et al., 1994). principles/values of a person has on the liability
On the societal level, taxpayers are concerned to pay taxes recommendation was also made
about the fairness of the outcomes of the whole by Kornhauser (2007) to the IRS (Inland
nation. If the tax system is perceived as unfair, Revenue Service) that they endorse a tax
tax non‐compliance is likely to increase morale approach to compliance that recognized
(Cowell, 1992). With respect to procedural the varying attitudes and behaviours of
justice, the elements essential for perceived taxpayers. Therefore, the attitude of a person
fairness are neutrality of the procedure, towards paying taxes is his/her individual
trustworthiness of the tax authorities and polite, perceptive and norms and in it self-motivation
dignified, and respectful treatment (Tyler and can be expressed by the term “tax morale”.
Lind, 1992). Perceived procedural justice on
the individual level are important for building up

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J. Equity Sci. & Sust. Dev.

Studies show that trust is negatively related to the level of willingness to pay taxes of
tax evasion, i.e., low trust in tax authorities are entrepreneurs is lower than that of employees.
correlated with high levels of tax evasion (Torgler 2007) In the next similar research, the
(Richardson, 2008). Under the form of audits tax system was used as an indicator, where the
and fines on tax evasion are found in many differences of the tax systems of the European
studies and a significant power is effective on states and the level of tax morale among the
persuasion. Therefore, term on tax evasion taxpayers of each state were compared. An
refers to intentional act of breaking the law in aggressive burden on tax policy has a negative
order to reduce taxes. It involves acts of influence on tax morale and the opposite policy
omission (e.g., failing to report certain helps to raise the tax morale. Researches also
revenues) or commission (e.g., false reporting showed that the way the government treats a
of personal expenses as business expenses) taxpayer has a consequence on the willingness
and is liable to prosecution penalty and fines of the taxpayer to pay taxes.
(Kirchler, 2007).
Investigated the differences in compliance
Some studies have revealed that ‘tax morale’ between South Korea and Japan and found out
has higher legitimacy for political institutions that tax culture is one fundamental determinant
that has led to higher tax morale values of these differences, with Japan having a
consequently has become an important higher level of tax culture and thus a higher
variable to investigate. (Torgler and Schneider level of compliance. Hyun (2005) studied the
2007).Therefore, compliance is highest in the link between tax morale and tax evasion
countries characterized by high control of analyzing data from 30 countries and showed
corruption and low size of bureaucracy (Picur that tax evasion is negatively related to
and Riahi-Belkaoui 2006). This was further economic freedom and high moral norms. Roth,
evidenced in a study of 30 developed and et al., (1989) argued that different cultural
developing countries (although primarily non- contexts which influence one’s perception of
African) that tax morale. Tax morale and events may drive one’s attitude towards tax
compliance is higher in countries characterized evasion.
by high control of corruption and low size of
bureaucracy (Picur and Riahi-Belkaoui, 2006). According to the robust findings of Richardson
This was further evidenced in a study of 30 (2006) derived from a 45-country analysis, non-
developed and developing countries (although economic factors have the strongest influence
primarily non-African) (Feld and Frey (2007) on tax evasion, i.e., lower levels of complexity
show the importance of the relationship and higher levels of fairness and tax morale
between taxpayers and tax authorities, lead to a decreased level of tax evasion across
emphasizing that mutual respect increases the countries. Torgler and Schneider (2009)
tax compliance level. Investigations support the showed that in many countries tax morale and
idea that trust of the authorities positively the high quality of societal institutions
influences the tax compliance. Various studies contribute to the reduction of the shadow
report that trust in the government and in economy. Alm and Torgler (2006) found a
governmental institutions positively influences significant positive correlation between tax
tax morale (Torgler, 2005). morale and trust (in the legal system and in the
parliament), as well as a considerable negative
Some entrepreneurs justified their negative correlation between tax morale and the size of
attitude for paying taxes above all because of shadow economy. Cummings et al. (2009)
the high tax rate (Kirchler, 2007). Upon the first concluded that cross-cultural differences in tax
valuation of tax morale as the expression of tax compliance are due to perceptions of tax
compliance, subjective tax burden was used as administration and taxpayers’ assessment of
an indicator in the research conducted at the government quality.
University of Cologne and it was found out that

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 Mama, 2019

Perception of Government Accountability Hasseldine and Hite (2003) examined whether

This is one of the psychological factors that attitudes toward the federal income tax system
influenced to the compliance behaviour. and the tax rebate vary by political party
Political stability of the ruling party of affiliation in the United States. Kim (2008) in his
government in a country may play a significant study on tax evasion in 50 countries each year
role in determining tax evasion behaviour. For illustrated these points and concluded that tax
example, if an individual favour the current evasion is influenced by price control (positive
ruling government party, he might choose to be direction), public service (positive), collected
compliant because he believes that the corporate tax (positive), GDP per capita
government is trusted, efficient and equitable. (positive), tax system (positive) and the
Logically, taxpayers, and especially those who composition of government spending (positive).
pay high amounts of tax, will be sensitive to Hasseldine and Hite (2003) concluded that
what the government spends their money on. firstly, political party affiliation has a significant
Studies on the relationship between the impact on taxpayers’ behaviour; secondly,
specifics of actual government spending and identified the tax provision is to a specific party,
tax compliance, particularly on tax evasion, are the more favourably it will be received by
very limited. Meanwhile, Roberts et al. (1994) members of that party relative to taxpayers with
also suggest that attitude to one's own tax other political party affiliations; thirdly, the policy
evasion (tax ethics), and attitude to other changes (the 2001 tax rebate) in this particular
people's tax evasion are important. It is also case tended to be viewed positively by
found that if taxpayers perceive that the taxpayers (i.e. creating an increase in
government is expending on something taxpayers trust and in voluntary compliance),
considered unnecessary or unbeneficial to the and those who did perceive it positively also
development of the country, here-again, the tended to perceive the current system as more
taxpayers tend to avoid and attempt to evade. fair.

Taxpayer’s perceptions are potentially Lewis (1982) argued that when myths and
important in determining their compliance misperceptions are replaced by knowledge, a
behaviour. In summary, the government should change in attitudes towards taxation will occur
prudently spend taxpayers’ money because the even if the taxpayers' basic ideology and
way in which the government spends the values remain unchanged and the tax law is
money produces different levels of compliance. unchanged. Suggests that attitudes should be
Many studies have shown that higher-educated examined for the degree to which they are a
people understand better the meaning of tax product of myth and misperception.
liabilities and the aim of governmental policies
and, as a consequence, they comply more Tax Knowledge
(Song and Yarbrough, 1978). From the three Tax knowledge is an essential element in a
aforementioned political determinants of tax voluntary compliance tax system. More recent
compliance, in the following we will draw studies undertaken in Malaysia (Loo, 2006; Loo
attention on tax law complexity. People’s et al., 2008; 2009) also suggested tax
understanding of tax law is an important factor knowledge to be the most influential factor to
which shapes their disposition to comply. determine taxpayers’ compliance behaviour
Results came much to the surprise of the under the self-assessment system. This is
researcher as respondents revealed a low level empirically established by several other studies
of knowledge and understanding of fiscal policy for example, (Kirchler et al., 2006), which
(Kirchler, 2007). Ironically, tax law is difficult to documented that possessing tax knowledge
understand and gives birth to uncertainty not would lead to higher compliance rates. On
only for ordinary citizens but also for tax similar note, the absence of tax knowledge may
authorities. lead to noncompliance behaviour among
taxpayers, either intentionally or unintentionally.

8
J. Equity Sci. & Sust. Dev.

Small business taxpayers are not even aware public institutions, particularly amongst tax
of their tax knowledge shortfall and this may officials. Higher levels of tax morale are
lead to unintentional non-compliance reported when corruption is (perceived to be)
behaviour. Such evidence was also under control (Committee on Fiscal Affairs and
documented among individual taxpayers in Development Assistance Committee Task
Malaysia who unintentionally committed Force on Tax and Development 2013).
mistakes in their tax return forms (Loo, et al.,
2008). If citizens associate local government
councillors with corrupt practices then they
Perception of Public Services discredit them as responsive leaders. Strong
According to Committee on Fiscal Affairs and negative relationship between perceived
Development Assistance Committee Task corruption and dissatisfaction with the
Force on Tax and Development (2013) different performance of political leaders and institutions
literatures identify that trust in government and is consistent across African countries and
satisfaction with democracy and with public across time (as measured in previous rounds of
services, health and education in particular, as Afrobarometer surveys). Indeed, popular
influencing tax morale. Further, the committee concerns about official corruption are
found out that building fiscal legitimacy lies in sufficiently strong and corrosive to partially
the support of the public for the government offset even if they do not completely counteract
and this in turn can help achieve greater results or eliminate positive performance evaluations.
in terms of fiscal revenue more than It is worth noting; however, that perceptions of
compliance alone. In taxation, satisfaction official corruption based on rumour or
towards service quality provided is also one of presumption may not be well founded (Michael
the criteria that will influence the taxpayers’ 2010).
level of compliance. In a cross country study by
Richardson (2006) (which involve 45 countries Factors of Tax Compliance in Ethiopia
all over the world), he finds that satisfaction The study conducted on the determinants of tax
towards the fairness of the tax law have a compliance behaviour in Ethiopia particularly in
significant negative relationship with tax Bahir Dar city administration by Tilahun (2014)
evasion. It shows that taxpayers will less revealed that perception on government
involve in tax evasion if they believed that the spending; perception on equity and fairness of
tax system is fair. the tax system; penalties; personal financial
constraint; changes on current government
If taxpayers generally perceive that the services policies; and referral group (friends, relatives
they receive as representing value for money, it etc.) are factors that significantly affect tax
should go a long way in enhancing voluntary compliance behaviour. However, gender and
tax compliance and, as a concomitant result, probability of being audited have no significant
also increase tax revenues. This applies to all impact on tax compliance behaviour. Finally,
levels of government, but especially to local the findings show that older people will comply
government – where government is closest to less if there is no equity and fairness in the tax
taxpayers (Riël, 2011). system and any changes in government policy
on fuel prices, electricity and water rates are
not favourable.
Perception of Corruption
Data from the three regional surveys, but A Study Conducted on The “Assessment of
especially from Africa point to a possible Taxpayers’ Voluntary Compliance With
relationship between willingness to pay tax and Taxation: A Case of Mekelle City, Tigray,
the perception of corruption. There is some Ethiopia by Desta (2010) concluded that
evidence to suggest that tax evasion is Fairness Or equity, organizational strength of
associated with perceptions of corruption in the tax authority, awareness, cultural factors,

9
 Mama, 2019

social factors and attitude towards the total tax revenues reveals that there were no
government are determinant factors that are significant difference found in terms of
affecting tax payers’ voluntary compliance. revenues performance though a little
Among the established variables, fairness or improvement is observed during the current
equity followed by organizational strength of the government in terms of tax revenues
tax authority, tax rate, tax information, simple mobilization which is still only 11.5%.
and transparent tax collection procedures and
tax education are found to be the most Delessa Daba (2014) claims that one of the
important determinant factors influencing tax more significant findings to emerge from his
payers’ voluntary compliance with tax law in the study is most striking when seen against the
study area. government comprehensive tax reforms effort
to increase tax is low performance. The
Delessa Daba (2014) has the view that Ethiopia government has been trying through
has been reforming its tax system for more comprehensive tax reforms which were strictly
than 20 years. Comprehensive tax reforms monitored by high political profile leaders to
started in 2002/03 as an integral part of mobilize tax revenue and to change tax
economic reforms. The main objective of the revenue structure from indirect tax in general
tax reforms was to mobilize tax revenues with and foreign trade tax in particular to direct tax
special focus on increasing the share of direct to reduce the possibility of revenue loss due to
tax contribution to total tax revenues to ensure continues tariff reduction in response to
fiscal sustainability and to reduce dependency international multilateral organizations pressure
on foreign trade tax which is volatile due to free for more economic openness. As can be seen
trade agreements and regional integration from here, comprehensive tax reforms and strict
long term perspective (Delessa Daba, 2014). monitoring by political leader were not able to
According to Federal Democratic Republic of secure the required amount of tax. The very
Ethiopia Ministry of Finance and Economic important factor that was not considered may
Development (2010) the period that covered be voluntary tax compliance from the
from 1992- 2013 expected from tax system taxpayers’ angle by considering the behavioural
flexibility in generating tax revenues with the aspects of taxation.
ratio of each categories of tax to GDP and to

10
J. Equity Sci. & Sust. Dev.

Audit
Type of Fine probabilies
employment
Tax rate
ECONOMIC Complexi
FACTORS ty of tax
Penalties
system

Tax audit
TAX COMPLIANCE

Perception of
corruption
Attitudes NON ECONOMIC
towards taxes FACTORS
Perceived fairness Tax
of tax system morale

Perception of
public Service Tax
Personal, social informati
and national Perception of on
norms government
accountabilit
y

Figure1: Model showing factors affecting tax compliance (Researcher’s own from
reviewed literatures, 2019)

Conclusions of factors may be responsible for low

This study provides an overview of the compliance in income tax administration in any
economical and non economical factors for tax revenue institutions in any countries. The
compliance that will support for researchers to developments of tax decision-making
examine individual tax compliance. The approaches have focused on economic and
findings of many studies suggest that behavioural factors affecting compliance.
taxpayers’ attitudes towards the tax system and
the way taxpayers feel treated by a tax From the economic factors perspective, tax
authority are important in explaining taxpayer fairness which is crucial seems to involve at
non‐compliance. Related to the tax system least two different dimensions (Jackson and
itself, there is specific evidence to suggest that Milliron, 1986): the first relates to the benefits
perceptions of unfair tax burdens can affect one receives for the tax given; the second
taxpayers’ views about paying tax and can go dimension involves the perceived equity of the
on to affect their compliance decisions. In this taxpayer’s burden in reference to that of other
sense, tax noncompliance is a serious individuals. This second dimension relates to
challenge facing tax administration and taxpayers’ perceptions of the vertical equity of
hindering tax revenue performance. A number the tax system. If a taxpayer were to feel that

11
 Mama, 2019

they pay more than their fair share of tax when

comparing themselves to wealthy taxpayers, The review of literature on the study subject
they are more likely to see paying tax as a here suggests that there are various elements
burden than a taxpayer not concerned about under both economic and non economic factors
these issues. affecting tax compliance. Therefore, scholars in
the area of tax compliance have greater
Moreover, this study examined the influence of opportunities to include these factors all in their
psychological factors on tax compliance model and try to identify the most important
decisions. To recognize ‘variables of tax factor in the context in which they conduct the
compliances’ analysed by various researchers, research.
which includes factors of psychological to be of
value for decisions to make on tax compliance The researcher brought into light that several
is emphasised in this review. However, factors affecting tax compliance were identified
taxpayers’ attitude has been identified as by previous researchers as of two types. They
crucial one factor that play important role in are economic and non economic ones. The
influencing tax compliance behaviour. Many detail review on the subject matter revealed
economic studies have revealed that tax that non economic factors are more important if
compliance is based on individual decisions on not the only factor and needs to be considered
paying and evading tax. The researches have for research, policy makers as well as for
further substantiated that the ‘impact’ of large practitioners in the areas of taxation.
number of potential determinants of voluntary
tax compliance are their individual Conflict of Interest
income/profit, social norms, equity and fairness, The author didn’t declare any conflict of interest
perception of government, and accountability regarding to this review.
towards tax compliance attitude.

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