Psychology of taxpayers and voluntary tax compliance (1)
Traditional economics postulated that voluntary tax compliance is determined by punitive measures in Tax laws aimed at deterring defaults. However, even as there have been many cases where tax defaulters have been severely punished by way of frozen accounts, seized landed property and at the extreme jail terms sentences; non-tax-compliance persists. It therefore follows that by implication punitive measures have failed to completely entrench voluntary compliance among taxpayers.
To reiterate, the focus of this paper is to examine the influence of psychological factors on behaviour of taxpayers for compliance. Modern explanation of factors influencing tax compliance is predicated on the psychological perception of the taxpayers. This perception borders more on Political Government Accountability. Damayanthi in his study on “Psychological Factors that affect Tax Compliance” published in 2015 noted that the perception of political government accountability is categorized into social norms, public spending, perceived fairness on tax system and moral tax.
Sigala et al. in their study on “Tax Communication and Social Influence: Evidence from a British sample” published in 1999 noted that social norms are one of the most important predictors of Tax compliance. According to the study, by approval or disapproval, norm-following and norm-breaking are accepted in a society and individual behaviour is adjusted by the norms. There are two major levels at which social norms are built and they include Personal and Society levels. These norms are important determinants of tax compliance and are behavioral standards.
Personal Norm presupposes that moral reasoning, values, religious beliefs, good upbringing as well as community values ensure voluntary tax compliance. Standards of behaviours such as honest personality, norm-dependency, or religious beliefs usually correlate with high Tax ethics and willingness to comply.
Society norms also determine the level of voluntary tax compliance. Relationship between Tax payer and authorities as well as the Tax legislation represent the integrated cultural standards of societal norms. When a mutually beneficial understanding exists between the Tax payers and the authorities, compliance is achieved effortlessly.
This can be related to the impasse currently brewing the Federal Inland Revenue Service and manufacturers who woke up to receive notices of Property Valuation and Assessment without any prior discussion and explanation. Of course manufacturers necessarily and justifiably kicked against it
Fairness and Equity
Fairness and equity of a tax system also impacts upon compliance levels. Perceived fairness of taxation has been found to strongly co-vary with compliance. Unfairness serves as rationalization and justification for tax non-compliance. A good tax system must be designed on the basis of an appropriate set of principles, such as equity or fairness and certainty. The most explicable requirement of equity or fairness is to treat equal people in equal circumstances in an equal way.
Fair treatment of taxpayers and a culture of mutual understanding between tax authorities and taxpayers improve trust in authorities and enhance compliance.
Tax morale is defined as the collective attitudes of a group or population to comply with tax law. Tax morale is linked to the motivational concept of civic duty. Tax morale and compliance is higher in countries characterized by high control of corruption, low size of bureaucracy and political stability. Richardson in his “Preliminary study of the impact of tax fairness perception dimensions on tax compliance behaviour in Australia” published in 2008 noted that low trust in tax authorities are correlated with high levels of tax evasion. Damayanthi also noted that ‘tax morale’ has higher legitimacy for political institutions that has led to higher tax morale values. Compliance is therefore highest in countries characterized by high control of corruption and low size of bureaucracy.
Generally, the tax attitude of taxpayers depends to a great extent on the ways tax revenue are collected and expended. It is found that if taxpayers perceive that the government is expending on something considered unnecessary or unbeneficial to the development of the country, taxpayers tend to avoid and attempt to evade tax. Taxpayer’s perceptions are potentially important in determining their compliance behaviours. In summary, the government should prudently spend taxpayers’ money because the way in which the government spends the money influences levels of compliance.
Overview of Tax Performance in Nigeria
Tax plays a crucial role in the development of any economy in the context of revenue generation and tools for economic stabilization. As a revenue generator, it provides the Government with the needed funds to offer welfare services to the citizenry. Taxes and tax systems are, therefore, central to any effort to build a nation especially in the developing world.
The key components of any tax system are tax policies and tax administration.
Frank Udemba Jacobs
Frank Udemba Jacobs, MAN president
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