Background of the Study
Tax compliance has been a topic of great interest to Revenue authorities especially in the developed countries. Hostility towards tax compliance is an age old problem. “Taxes are considered a problem by everyone. Not surprising, taxation problems date back to the earliest recorded history” (Taxworld Organization, 1999). Developing countries, perhaps due to their frequent budget deficits have not been able to conduct comprehensive research on the behavior of taxpayer in relation to compliance. Hostility between the taxpayers and tax collectors on issue relating to tax compliance is evidenced by frequent tax evasion reports in our local newspapers (Juma, 2010) and outward resistance from taxpayers for example the recent protest by taxpayers over implementation of Electronic Tax Registers. Hostility towards tax compliance could be explained in terms of the deterrence theory which implies that taxpayers make calculations of the economic consequences of different compliant alternative, such as whether or not to evade tax; the probability of detection and consequences thereof, and choose the alternative which maximizes their expected after tax-return/profit possibly after adjustment for the desired level of risk (Trivedi, Shehata & Mestelman, 2005). Hostile taxpayer’s behavior implies that given a chance taxpayers would not comply with tax laws. Hostility towards tax compliance could also be explained by the expected utility theory which is an economic analysis that frames the decision to pay as a rational attempt to maximize ‘profits’ (Grant & Van Zandt, 2007). The basic assumption is that people are free riders: no one will voluntarily contribute tax unless the threat of punishment makes it sensible. Thus, traditionally, tax evasion has been understood in terms of the benefits of successful evasion weighed against the risk of detection and punishment
Hessing and Elffers (1993) treat tax evasion as defective behavior within a
social dilemma. It is the social dilemma which has made tax of interest to social psychologists. Just as the tax system confronts people with the choice between co-operative behavior
(paying taxes in full) and non-co-operative behavior (evading some or all taxes), so does the social security system: individuals would
be better off if they broke the rules, but the whole system would break down if it was abused by all. More recent tax evasion research supports the claim that as well as the risk of discovery and punishment, non-economic factors also influence taxpaying behavior, for example, ethics, perceived fairness, social norms, psychological orientation and
‘tax morale’ (Alm and Torgler, 2006;
Cowell, 1992; Kirchler, 1999; Wenzel, 2002, 2004).
A number of such social psychological factors have been used to explain the complexity of taxation compliance behavior. Kenya is ranked among low-income countries or low-compliance countries with hard task of ensuring efficient and effective tax administration. “Kenya Revenue Authority is supposed to promote compliance with Kenya’s tax and to ensure responsible enforcement by highly motivated and professional staff thereby maximizing revenue collection at the least possible cost for the social-economic well being of Kenyans” (CIAT, 2006). KRA administers different types of taxes under different Laws (Acts) such as Income Tax, Value Added Tax, Custom duties and Excise Tax among many others. Hence, KRA is supposed to ensure taxpayers comply with the respective tax laws. In Kenya, one of the main challenges of the Tax Modernization Program is the large informal sector. The MSE sector in Kenya is large and growing in numbers. The first National Baseline Survey of 1993 identified 910,000 micro and small enterprises (excluding agro-based activity) employing about 2.0 million people. The second National Baseline Survey of 1999 identified 1.3 million enterprises with about 2.4 million people involved. This sector requires treatment other...
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