Economic versus Non-Economic Factors: Which is More Relevant to an Individual's Tax Compliance Decisions in a Developing Economy?

Joseph Asare,Jones Adjei Ntiamoah

doi:10.13189/ujaf.2022.100119

Abstract

Tax compliance study, which is linked with the study of human behavior, remains complex and evolving. The complex nature of taxpayers who are humans coupled with the inconsistencies in the methodologies and approaches used by tax compliance researchers have added to the complexity. Again, it remains unclear as to what motivates a typical taxpayer in a developing economy to honor their tax obligations voluntarily. To understand this complexity, a survey was conducted using questionnaires containing a list of economic and noneconomic tax compliance factors. A total of five hundred (500) respondents who are taxpayers located in four different developing economies were selected. The study found that understanding tax compliance decisions of taxpayers in developing economies requires at least some appreciation of the underlying factors which influence individual taxpayer's decision about whether to pay or evade taxes. The findings from this study prove that tax compliance decisions of individual taxpayers in developing economies are highly influenced by non-economic factors. However, to achieve improved tax compliance among individuals in a developing country, equal attention would be required for both factors. Further, the study provides some preliminary evidence that paying attention to the noneconomic factors could play a vital role in improving tax compliance level among individuals by up to 89% whereas compliance level could improve by only 11% if attention is paid to only the economic aspects of tax compliance decisions.

Highlights

Tax compliance remains a major topical issue which continues to generate debates and attract the attention of tax scholars, tax policy makers and administrators
The economics-of-crime model suggested that high-fine-low-probability of audit result in a framework where rational individuals compare the benefit of violating the law with the possible cost
Managing tax compliance in developing economies requires an in-depth understanding of the factors which influence the individual taxpayer‟s decisions on whether or not to pay taxes

Summary

Introduction

Tax compliance remains a major topical issue which continues to generate debates and attract the attention of tax scholars, tax policy makers and administrators. The complexity of analyzing tax compliance behaviors among tax scholars bothers on understanding of what influences an individual‟s tax compliance Among such well-known approaches is the economics-of crime approach [1] later developed by Alingham and Sandmo [6]. Severity of punishment [2] The fiscal psychology model developed by [7] and later supported by [8] describe tax compliance behaviour among individuals as a combination of some aspects of the economics-of-crime model and social psychology model [7]. These models assume that a combination of economic, social and psychological factors do influence compliance. Whether an individual taxpayer is more influenced to honor his or tax obligations voluntarily without envisaging any economic benefit or contemplating punishment through fines

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