The Impact of Tax Compliance Costs On Tax Compliance Behaviour
Abstract
This paper is based on a study that determined whether or not an increase in income tax compliance costs leads to a decrease in income tax compliance.
The tax context experiment involved 75 small and medium entrepreneurs based in Dar es Salaam, Tanzania’s business hub. The participants were first randomly assigned to one of the three experiment treatments. In the first treatment, the tax compliance cost was TAZ 50,000; in the second, it was TAZ 100,000; and in the third, it was TAZ 166,667. Each participant in each treatment received income of TAZ 1,000,000. TAZ is a laboratory currency which, at the end of the experiment, was exchanged at the rate of TAZ 120 for 1 actual Tanzania shilling (Tsh). Generally, the results indicated that tax non-compliance significantly increased as tax compliance costs increased.
Although the study used small samples of SME taxpayers, therefore the results may not be generalisable, the results imply that tax compliance costs may be responsible for the unsatisfactory tax compliance levels of SME taxpayers. Therefore, there is a need for tax system simplification.
References
Adams, J. (1965). Inequity in social exchange. In: L. Berkowitz (Ed.) Advances in Experimental Social Psychology, (Vol 2, pp.267-299). New York: Academic Press.
Allingham, M.G., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1, 323-338.
Alm, J., Jackson, B., & McKee, M. (1992). Institutional uncertainty and taxpayer compliance. The American Economic Review, 82, 1018-1026.
Alm, J. (1999a). A perspective on the experimental analysis of taxpayer reporting. The Accounting Review, 66, 577-593.
Alm, J. (1999b). Tax Compliance and Administration. In: W.B. Hildreth & J.A. Richardson (Eds.), Handbook on Taxation, pp.741-768. New York: Marcel Dekker, Inc.
Alm, J. (2010). Testing Behavioral Public Economics Theories in the Laboratory. National Tax Journal, 63, 635-658.
Alm, J., Bloomquist, K., & McKee, M. (2010a, November). On the External Validity of Tax Compliance Experiments. Paper presented at the 103rd Annual Meeting of the National Tax Association, Chicago, IL.
Alm, J., Cherry, T., Jones, M., & McKee, M. (2010b). Taxpayer information assistance services and tax compliance behavior. Journal of Economic Psychology, 31, 577-586.
Alm, J., & Torgler, B. (2011). Do ethics matter? Tax compliance and morality. Journal of Business Ethics, 101, 635-651.
Arachi, G., & Santoro, A. (2007). Tax enforcement for SMEs: Lessons from the Italian experience? eJournal of Tax Research, 5(2), 225-243.
Ariff, M., Ismail, Z., & Loh, A. (1997). Compliance costs of corporate income taxation in Singapore. Journal of Business Finance and Accounting, 24(9-10), 1253-1268.
Blumenthal, M., & Slemrod, J. (1992). The Compliance Cost of the US Individual Income Tax System: A Second Look After Tax Reform. National Tax Journal, 45, 185-202.
Bordignon, M. (1993). A fairness approach to income tax evasion. Journal of Public Economics, 52(3), 345-362.
Braithwaite, V.A. (2003). Perceptions of who's not paying their fair share. Australian Journal of Social Issues, 38(3), 335-62.
Cadsby, C.B., Maynes, E., & Trivedi, V.U. (2006). Tax compliance and obedience to authority at home and in the lab: A new experimental approach. Experimental Economics, 9, 343-359. doi:10.1007/s10683-006-7053-8
Chang, J.B., Lusk, J.L., & Norwood, F.B. (2009). How closely do hypothetical surveys and laboratory experiments predict field behavior? American Journal of Agricultural Economics, 91(2), 518-534. doi: 10.1111/j.1467-8276.2008.01242.x
Chang, O.H., Nichols, D.R., & Schultz, J.J. (1987). Taxpayer attitudes toward tax audit risk. Journal of Economic Psychology, 8(3), 299-309.
Chittenden, F., Kauser, S., and Poutziouris, P. (2005). PAYE-NIC Compliance Costs: Empirical Evidence from the UK SME Economy. International Small Business Journal, 23(6), 635-656. doi: 10.1177/0266242605057656
Choo, C. L., Fonseca, M. A., & Myles, G. D. (2016). Do students behave like real taxpayers in the lab? Evidence from a real effort tax compliance experiment. Journal of Economic Behavior & Organization, 124(C), 102-114.
Clotfelter, C.T. (1983). Tax Evasion and Tax Rates: An Analysis of Individual Returns. The Review of Economics and Statistics, 65(3), 363-373.
Cohen, J. (1988). Statistical Power Analysis for the Behavioral Sciences. New York: Academic Press.
Conover, W.J., & Iman, R.L. (1981). Rank transformations as a bridge between parametric and nonparametric statistics. The American Statistician, 35, 124-129.
Coolidge, J. (2012). Findings of tax compliance cost surveys in developing countries. eJournal of Tax Research, 10(2), 250-287.
Cronan, T.P., Epley, D.R., & Perry, L.G. (1985). The use of rank transformation and multiple regression analysis in estimating residential property values with small sample. Journal of Real Estate Research, 1(1), 19-31.
Cuccia, A.D., & Carnes, G.A. (2001). A closer look at the relation between tax complexity and tax equity perceptions. Journal of Economic Psychology, 22, 113-140.
Davis, J.S., & Swenson, C.W. (1988). The role of experimental economics in tax policy research. The Journal of the American Taxation Association, Fall 1988, 40-59.
Dubin, J.A., & Wilde, L.L. (1988). An empirical analysis of federal income tax auditing and compliance. National Tax Journal, 41(1), 61-74.
Dubin, J.A., Graetz, M.J., & Wilde, L.L. (1990). The effect of audit rates on the federal individual income tax, 1977-1986. National Tax Journal, 43(4), 395-409.
Eichfelder, S., & Kegels, C. (2014). Compliance costs caused by agency action? Empirical evidence and implications for tax compliance. Journal of Economic Psychology, 40(C), 200-219.
Evans, C. (2003). “Taxing personal capital gains: Operating cost implication”. Australian Tax Research Foundation, 2003.
Evans, C. (2008). “Taxation compliance and administrative costs: an overview”. In M. Lang, C. Obermair, J. Schuch, C. Staringer & P. Weninger (Eds.) Tax compliance costs for companies in an enlarged European Community (pp.447-468). Vienna, Austria: Linde Verlag and London, Kluwer Law International.
Evans, C. (2003). Studying the studies: An overview of recent research into taxation operating costs. eJournal of Tax Research, 1(1), 64-92.
Evans, C., Hansford, A., Hasseldine, J., Lignier, P., Smulders, S., & Vaillancourt, F. (2014). Small business and tax compliance costs: A cross-country study of managerial benefits and tax concessions. eJournal of Tax Research, 12(2), 453.
Feld, L.P., & Frey, B.S. (2007). Tax Compliance as the Result of a Psychological Tax Contract: The Role of Incentives and Responsive Regulation. Law and Policy, 29, 102-120. doi: 10.1111/j.1467-9930.2007.00248.x
Fjeldstad, O.H., & Semboja, J. (2001). Why people pay taxes: The case of the development levy in Tanzania. World Development, 29(12), 2059-2074.
Forest, A., & Sheffrin, S.M. (2002). Complexity and compliance: An empirical investigation. National Tax Journal, 55(1), 75-88.
Friedland, N., Maital, S., & Rutenberg, A. (1978). A simulation study of income tax evasion. Journal of Public Economics, 10(1), 107-116.
Hair, J.F., Black, W.C., Babin, B.J., & Anderson, R.E. (2010). Multivariate Data Analysis: A Global Perspective. Pearson: New Jersey.
Hall, A.P., (1996). Compliance costs of alternative tax systems II house ways and means committee testimony. Tax Foundation, Special Brief.
Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2-3), 127-178.
Heyndels, B., & Smolders, C. (1995). Tax complexity and fiscal illusion. Public Choice, 85(1-2), 127-141.
HMRC, & the Rt. Hon. David Gauke. (2012, March). Making tax easier, quicker and simpler for small business. Retrieved from http://webarchive.nationalarchives.gov.uk/20120405125629/http:/www.hmrc.gov.uk/budget2012/sme-4756.pdf
Jackson, B.R., & Milliron, V.C. (1986). Tax compliance research, findings, problems and prospects. Journal of Accounting Literature, 5, 125-155.
James S., & Alley C. (2002). Tax compliance, self-assessment and tax administration. Journal of Finance and Management in Public Services, 2(2):27–42.
James, S., & Wallschutzky, I.N. (1997). Tax law improvement in Australia and the UK: The need for a strategy for simplification. Fiscal Studies, 18(4), 445-460.
Kinsey, K.A., & Grasmick, H.G. (1993). Did the Tax Reform Act of 1986 improve compliance? Three studies of pre‐and post‐TRA compliance attitudes. Law and Policy, 15(4), 293-325.
Kirchler, E. (1999). Reactance to taxation: Employers' attitudes towards taxes. Journal of Socio-Economics, 28(2), 131-138.
Kirchler, E., Muehlbacher, S., Kastlunger, B., & Wahl, I. (2007). Why pay taxes? A review of tax compliance decisions. Working Paper, pp. 1-27. Georgia, USA: International Studies Program, Andrew Young School of Policy Studies.
KPMG LLP. (2006, March). Administrative Burdens – HMRC Measurement Project, Publication Number 300-808.
Lignier, P., and Evans, C. (2014). “The Rise and Rise of Small Business Tax Compliance Costs in Australia”. Australian Tax Forum, 27(3), 615-672.
Makara, T. & Pope, J. (2013). Estimates of the compliance costs of value added tax in Botswana. New Zealand Journal of Taxation Law and Policy, 19(3), pp. 183–221.
Marcuss, R., Contos, G., Guyton, J., Langetieg, P., Lerman, A., Nelson, S., Schafer, B., & Vigil, M. (2013). Income Taxes and Compliance Costs: How Are They Related? National Tax Journal, 66(4), 833-854.
McBarnet, D. (2001). When compliance is not the solution but the problem: From changes in law to changes in attitude. Canberra: Australian National University, Centre for Tax System Integrity.
McKerchar, M.A. and Evans, C. (2009). Sustaining Growth in Developing Economies Through Improved Taxpayer Compliance: Challenges for Policy Makers and Revenue Authorities. UNSW Law Research Paper, No. 2009-17. SSRN eLibrary. Available at: http://ssrn.com/abstract=1415164
Mitchell, M.L., & Janina, M.J. (2013). Research Design Explained. Belmont, USA: Wadsworth Cengage Learning.
Moser, D.V., Evans III, J.H., & Kim, C.K. (1995). The effects of horizontal and exchange inequity on tax reporting decisions. The Accounting Review, 70(4), 619-634.
Mulder, L.B., Verboon, P., & De Cremer, D. (2009). Sanctions and moral judgments: The moderating effect of sanction severity and trust in authorities. European Journal of Social Psychology, 39, 255-269. doi: 10.1002/ejsp.506
Murphy, K., & Tyler, T. (2008). Procedural justice and compliance behaviour: The mediating role of emotions. European Journal of Social Psychology, 38(4), 652-668.
Oliver, T., & Bartley, S. (2005). Tax system complexity and compliance costs - Some theoretical considerations. Economic Roundup, pp. 53-68.
Paul, D.L. (1997). The Sources of Tax Complexity: How Much Simplicity Can Fundamental Tax Reform Achieve? North Caroline Law Review, 76, 151-221.
Picciotto, S. (2007). Constructing compliance: Game playing, tax law, and the regulatory state. Law and Policy, 29(1), 11-30.
Pope, J. (1995). The compliance costs of major taxes in Australia. In C.T. Sandford (Ed.), Tax Compliance Costs: Measurement and Policy (pp. 101-125). Bath: Fiscal Publications.
Quandt, R.E. (1983). Complexity in regulation. Journal of Public Economics, 22(2), 199-214.
Reckon LLP. (2009, September). Study to quantify and analyse the VAT gap in the EU-25 member states. Report for DG Taxation and Customs Union.
Richardson, G. (2006). Determinants of tax evasion: A cross-country investigation. Journal of International Accounting, Auditing and Taxation, 15(2), 150-169.
Richardson, J.T. (2011). Eta squared and partial eta squared as measures of effect size in educational research. Educational Research Review, 6(2), 135-147.
Roberts, M.L., & Hite, P.A. (1994). Progressive Taxation, Fairness, and Compliance. Law and Policy, 16(1), 27-48.
Saad, N. (2010). Fairness Perceptions and Compliance Behaviour: The Case of Salaried Taxpayers in Malaysia after Implementation of the Self-Assessment System. eJournal of Tax Research, 8(1), pp. 32-63.
Sandford, C., & Hasseldine, J. (1992). The Compliance Costs of Business Taxes in New Zealand. Wellington, New Zealand: Victoria University Press for the Institute of Policy Studies.
Sandford, C., Godwin, M., & Hardwick, P. (1989). Administrative and Compliance Costs of Taxation. Bath: Fiscal Publications.
Schoonjans, B., Van Cauwenberge, P., Reekmans, C., & Simoens, G. (2011). A Survey of Tax Compliance Costs of Flemish SMEs: Magnitude and Determinants. Environment and Planning C: Politics and Space, 29(4), 605-621. doi:10.1068/c1077b
Shaw, J., Slemrod, J., & Whiting, J. (2008). “Administration and compliance: Chapter prepared for the Report of a Commission on Reforming the Tax System for the 21st Century (Mirrlees Review)”, Institute for Fiscal Studies.
Shekidele, C. (1999). Measuring the compliance costs of taxation excise duties 1995-96. The African Journal of Finance and Management, 7(2), 72-84.
Slemrod, J. (2009, 19 June). Complexity in the Australian tax and transfer system. Paper presented at Australia's Future Tax and Transfer Policy Conference, Melbourne Institute of Applied Economic and Social Research, Melbourne.
Slemrod, J., & Sorum, N. (1984). The Compliance Cost of the U.S. Individual Income Tax System. National Tax Journal, 37(4), 461-474.
Slemrod, J., & Venkatesh, V. (2002, September). The income tax compliance cost of large and mid-size businesses. Ross School of Business Paper No. 914. doi: 10.2139/ssrn.913056
Slemrod, J. (2007). Cheating ourselves: The economics of tax evasion. The Journal of Economic Perspectives, 21(1), 25-48.
Slemrod, J.B., & Blumenthal, M. (1996). The income tax compliance cost of big business. Public Finance Review, 24(4), 411-438.
Small and Medium Enterprise Development Policy (2003). Dar es salaam: Government Publisher. Available from: http://www.tzonline.org [Accessed 15th November 2011].
Smith, V.L. (1982). Microeconomic systems as an experimental science. The American Economic Review, 72(5), 923-955.
Spicer, M.W., & Hero, R.E. (1985). Tax evasion and heuristics: A research note. Journal of Public Economics, 26(2), 263-267.
Spicer, M.W., & Everett Thomas, J. (1982). Audit probabilities and the tax evasion decision: An experimental approach. Journal of Economic Psychology, 2(3), 241-245.
The Income Tax Act (2004) (C. 332). Dar es salaam.
Torgler, B. (2002). Speaking to Theorists and Searching for Facts: Tax Morale and Tax Compliance in Experiments. Journal of Economic Surveys, 16(5), 657-683.
Torgler, B. (2003). Beyond Punishment: A Tax Compliance Experiment with Taxpayers in Costa Rica. Revista de Análisis Económico, 18(1), 27-56.
Tran-Nam, B., Evans, C., Ritchie, K., & Walpole, M. (2000). Tax Compliance Costs: Research Methodology and Empirical Evidence from Australia. National Tax Journal, 53(2). Doi: 10.17310/ntj.2000.2.04
Vaillancourt, F., Roy-César, É., & Silvia Barros, M. (2013). The Compliance and Administrative Costs of Taxation in Canada 2013. Fraser Institute Studies in Tax Policy.
Verboon, P., & van Dijke, M. (2011). When do severe sanctions enhance compliance? The role of procedural fairness. Journal of Economic Psychology, 32(1), 120-130.
Wartick, M.L., Madeo, S.A., & Vines, C.C. (1999). Reward Dominance in Tax Reporting Experiments: The Role of Context. The Journal of the American Taxation Association, 21(1), 20-31.
Webley, P., & Halstead, S. (1986). Tax Evasion on the Micro: Significant Simulations or Expedient Experiments. Journal of Interdisciplinary Economics, 1(2), 87-100. doi: 10.1177/02601079X8600100204
Wenzel, M. (2002). The Impact of Outcome Orientation and Justice Concerns on Tax Compliance: The Role of Taxpayers' Identity. Journal of Applied Psychology, 87(4), 629-645.
Wenzel, M. (2004). An analysis of norm processes in tax compliance. Journal of Economic Psychology, 25(2), 213-228.
World Bank Group & PWC. (2011). Paying Taxes 2011 – The Global Picture. Available at www.doingbusiness.org
Yesegat, W. A. (2009). Value added tax in Ethiopia: A study of operating costs and compliance (Unpublished doctoral dissertation). University of New South Wales, Sydney, Australia.
Yitzhaki, S. (1974). Income tax evasion: A theoretical analysis. Journal of Public Economics, 3(2), 201-202.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2017 Deogratius Ng'winula Mahangila
This work is licensed under a Creative Commons Attribution 4.0 International License.
Our open access status means that authors retain the copyright of their work. However, all papers published in JOTA are done so under a Creative Commons Attribution 4.0 International license (CC BY). This means that others can share and/or adapt your work without your permission as long as they follow certain rules, including attributing your work correctly.
You can learn more about this on our Open Access, Licensing, and Copyright Policies page.
