When do people pay taxes voluntarily?

Photo: Bar in Addis Abeba, Ethiopia, where this study was partially conducted. (CC BY-NC-ND 2.0Andrea Moroni)

Making people pay their taxes is hard enough for any governmental taxation agency. This becomes more challenging in developing countries, where people often trust their governments less or even doubt their legitimate power. PhD graduate Lemessa Bayissa Gobena of Rotterdam School of Management, Erasmus University (RSM) researched what makes people comply voluntarily with tax laws under such difficult circumstances. He discovered that ‘procedural justice’, the fair decision-making procedures, becomes an even more important tool to increase tax revenue.

To encourage people to pay taxes, taxation agencies can use one of two approaches, Gobena says. Deterrents and threats to enforce tax laws can be effective in increasing compliance, but are also costly. On the other hand, encouraging people to comply voluntarily with tax laws is more cost-effective, but requires knowledge of the underlying psychological mechanisms that drive people to pay taxes.

Procedural justice

Earlier research has shown that ‘procedural justice’ is one of the most important of these psychological mechanisms, Gobena continues. This refers to tax authorities’ decision-making procedures and how fair people judge them to be. Is the authority perceived as consistent, unbiased and ethical? Does everybody get the same treatment? A perception of good procedural justice in general leads to more people paying taxes.

In his PhD research Gobena was interested to find out if procedural justice still has the power to encourage people to collaborate with taxation authorities, even when they see their governments as illegitimate, or identify very little with the country as a whole, as is often the case in developing countries. To find out he conducted surveys in the United States and in Ethiopia.

He discovered that the effect of procedural justice becomes stronger when the legitimate power wielded by a tax authority is regarded as low. This happens when people believe the authorities are incompetent at enforcing tax laws, for example. Under these conditions procedural justice can also help to enhance trust in tax authorities, he found.

His results also showed that tax authorities performing frequent audits and not discriminating between inadvertent tax evaders and genuine tax frauds would be well advised to keep to high standards of procedural justice. When people feel they have been justly treated, despite this high ‘coercive power’ and lots of controls, people will still pay their taxes voluntarily more often.

National identification

In developing countries people often don’t feel a strong connection to institutions such as tax authorities, or the nation as a whole, Gobena says.  Widespread corruption makes people feel as if they don’t get their tax money’s worth in the form of roads, schools and affordable housing and this undermines their sense of national pride. In this case, taxation agencies that make their decision-making more fair and transparent can expect to see collect more of the taxes due, the research shows.

Distributive justice

When people feel their government is not spending the collected taxes for the benefit of everyone, or is serving just a small or privileged group, they are typically less likely to pay their taxes voluntarily. Fair procedures can only make up for this lack of ‘distributive justice’ if people see their government as legitimate, Gobena also found.

This study shows that tax officials everywhere can increase their revenues by suppressing their own self-interest and treating citizens fairly, says the researcher. But this effect is much stronger in developing countries where relationships with authorities are often troubled, he concludes.

Download Gobena’s PhD thesis here: Towards Integrating Antecedents of Voluntary Tax Compliance

Rotterdam School of Management, Erasmus University (RSM) is one of Europe’s top 10 business schools. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam – a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who can become a force for positive change by carrying their innovative mindset into a sustainable future. Our first-class range of bachelor, master, MBA, PhD and executive programmes encourage them to become critical, creative, caring and collaborative thinkers and doers. Study information and activities for future students, executives and alumni are also organised from the RSM office in Chengdu, China. www.rsm.nl

For more information about RSM or this release, please contact Ramses Singeling, Media Officer for RSM, on +31 10 408 2028 or by email at singeling@rsm.nl.

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