Abstract
People’s perceptions of a fair tax administration system have garnered growing interest as a decisive ingredient that can install compliance behavior among taxpayers. The tax that taxpayers wish to evade is determined by their perceptions of the various robust dimensions of fairness (i.e., general fairness, preferred tax rate structure, exchange with the government, special provisions, and self-interest). Such an important matter, like tax fairness, has been overlooked in the extant literature, especially in the Middle East context, although tax administrations still suffer from low and unsatisfactory rates of compliance. This paper aims to empirically examine the influence of fairness perceptions of the income tax system on compliance behavior of taxpayers in Yemen. The study used a survey questionnaire administered to 400 individual taxpayers in Hadhramout, one of the most prosperous business regions in Yemen. Based on the PLS-SEM analysis tool, the study found that general system fairness, preferred tax rate, exchange with the government, and the extent of self-interest are significantly related to income tax compliance, while special provisions do not affect compliance decisions. The results of the study can alert the tax authority and policymakers to consider the non-pecuniary factors, other than the measures of the coercion. Establishing a fair tax system is probably one of the most successful approaches to boost compliance among taxpayers, thus yielding more tax revenue and diminishing the administrative cost for the tax authority.
Highlights
A sound understanding of tax compliance is crucial in both theory and practice
Richardson (2006) indicated that while all the five dimensions of tax system fairness, adapted from Gerbing’s (1988) study conducted in the US exist in the context of Hong Kong, the general fairness, the benefit received from the government and preferred tax rate structure are the most significant dimensions of tax system fairness
By adopting cross-sectional research based on a survey of individual taxpayers in Yemen – consistent with prior studies – this study found that general system fairness, favored tax rate, exchange and reciprocal relationship with the government and extent of self-interest have a significant relationship with taxpayers’ decisions to comply with tax provisions
Summary
It has been acknowledged that a gambling model has been extensively used to examine taxpayers’ compliance behavior (Jun, Cho, & Park, 2015) This model assumes that taxpayers take the risk of the probability of being caught and penalized for evading their tax obligations – they could report optimal levels of income by balancing the benefit of evading taxes and the cost of the potential sanctions imposed, especially when the tax authority detects non-compliance behavior. Based on previous research, the dominant attribute of the economic approach (deterrence-based enforcement) is that it considers that the relationship between taxpayers and the authority is dependent on coercive treatment (Bordignon, 1993) This approach has not succeeded much in explaining a high level of tax compliance. Given the current levels of tax rate, audit, and penalty rate of many countries, people honestly report their taxable income and evade tax less than what is expected by the model (Alm et al, 1992; Bin-Nashwan, Abdul-Jabbar, & Aziz, 2019; Gilligan & Richardson, 2005; Slemrod & Yitzhaki, 2002)
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