Why some people don’t pay taxes
What makes you pay your taxes voluntarily? Apart from tax payment, there are several tax compliance obligations under the tax laws. Broadly tax obligations can be clustered into four groups: (a) registration in the system or deregistration from it (think of VAT for example); (b) timely filing or lodgement of requisite taxation information (filing tax returns for example); (c) reporting of complete and accurate information (incorporating good record keeping); and (d) payment of tax on time. If you abide by these, you are tax compliant. You breach any, you are non-compliant.
But what sort of factors influence tax compliance (or non-compliance)? Understanding taxpayers behaviours and factors that influence compliance behaviour are crucial for a successful tax administration. But there are no hard and fast rules. The question has been a subject of numerous researches and it does not appear there is any firm consensus. Broadly the research literature identifies two broad approaches to the problem of compliance. Economic and behavioural approaches. Under these two, several factors emerge as significant in explaining or influencing tax compliance behaviours. I start with economic factors.
How big is the financial burden?
There appears to be a relationship between the amount of tax liability and taxpayer compliance behaviour. If a business owner or an individual has a tax liability that can easily be paid, likely, they may be willing to comply. But if the liability is perceived to be huge by the taxpayer and potentially threatening the viability of the business there is a good chance that the owner may avoid paying the tax. Avoiding the whole tax liability is one possibility. Another is to fraudulently adjust the data (for example, reducing sales or increasing expenses) such that a lesser amount of tax is paid.
What is the cost of compliance?
Taxpayers may face several costs of having to comply with their tax obligations over and above the actual amount of tax they pay. These include the time taken to comply with tax obligations, the cost of hiring and relying on accountants and tax consultants and the indirect costs associated with the complexity of tax laws. These can include ‘psychological’ costs such as stress that comes from not being certain that they have met all the tax rules or even knowing what those rules are. Record keeping and maintenance of documents may also be costly. The available methods of effecting tax payments may also come with a cost. Also, taxpayers especially small businesses often express resentment about being ‘tax collection agents’ for taxes such as withholding tax and VAT. Think of when VAT is due for payment but as a taxpayer you have not or for some reasons you cannot collect the same from your customer.
Carrots or sticks?
Incentives: Are there rewards for being tax compliant? Some studies have shown that giving taxpayers incentives may have a positive effect on compliance behaviour (i.e. taxpayers becoming more compliant). I recall some few years back, TRA used to organize Taxpayers’ Day. Among other things, those who were considered as best taxpayers in various categories were rewarded. The RRA in Rwanda still has a similar practice.
Disincentives: The potential amount of interest, penalties or fines for non-compliance also tends to influence taxpayer compliance behaviour. Also, those who are compliant tend to want those who are non-compliant to be punished. However, studies of the impact of these financial deterrents as well as the threats of prosecution(s), suggest that they may have a time-limited effect on compliance behaviour of taxpayers.
By Shabu Maurus, Tax Partner, Auditax International.