Theoretical foundations of voluntary tax compliance: evidence from a developing country

The study addresses the persistent global issue of tax non-compliance and its impact on the gap between potential and actual tax revenues, highlighting the Ethiopian context where widespread tax evasion threatens the tax base. It reviews how taxpayer behavior is influenced by factors such as tax rates, detection probability, penalties, incentives, social norms, fairness perceptions, political trust, and perceived behavioral control. Prior empirical findings on determinants like fairness and tax knowledge are inconsistent, motivating further investigation grounded in multiple tax compliance theories. The study aims to identify factors shaping voluntary tax compliance among large Ethiopian taxpayers and to test corresponding hypotheses.

The paper synthesizes multiple theoretical frameworks to explain tax compliance behavior and derive hypotheses: (1) Fiscal exchange theory posits that compliance increases when taxpayers perceive valuable public goods and services funded by taxes; positive incentives (rewards) can enhance compliance. H1: Rewards and incentives positively and significantly affect tax compliance. (2) Social influence and comparative treatment theory argue that social norms, perceptions of peers' compliance, and fairness (horizontal and vertical equity) influence compliance. H2: Perceived fairness of the tax system positively and significantly affects compliance. (3) Political legitimacy theory emphasizes that citizens' trust in government drives willingness to comply. H3: Perceived government trust has a positive and significant effect on compliance. (4) Theory of planned behavior highlights the role of attitudes, subjective norms, and perceived behavioral control; tax knowledge and education bolster the ability and intention to comply. H4: Taxpayers' tax knowledge positively and significantly affects compliance. (5) Economic deterrence theory states that compliance is shaped by expected benefits and costs, including tax rates, detection likelihood, penalties, and compliance costs. H5: Compliance costs negatively and significantly affect compliance.

Design: Quantitative approach examining relationships between independent variables (rewards and incentives, fairness of the tax system, perception of government trust, taxpayers' tax knowledge, compliance costs) and voluntary tax compliance among large Ethiopian taxpayers. Sample and data: Primary data from 1550 large taxpayers via closed-ended questionnaires using 5-point Likert scales (1 = strongly disagree to 5 = strongly agree). Questionnaires were adapted from Nandal et al. (2021), Sapiei and Abdullah (2008), and Augustine and Enyi (2020). Model: Ordered logit (ordinal logistic regression, proportional odds model) selected because the dependent variable (voluntary tax compliance level) is ordered (low, medium, high). General model: ln[p/(1−p)] = β0 + β1X1 + ... + βkXk + εi, with thresholds μ1 and μ2 defining categories: y=1 if yi* ≤ μ1; y=2 if μ1 < yi* ≤ μ2; y=3 if yi* > μ2. Dependent variable construction: Tax compliance level (Yi) computed as the average of items including timely filing of returns, timely reporting of income, satisfaction with tax payment, payment without enforcement, and an overall compliance self-assessment (each scored 1–5). Independent variables: RI = Rewards and incentives; FTS = Fairness of tax system; PGT = Perception of government trust; TPTK = Taxpayers' tax knowledge; CC = Compliance costs. Estimation and software: Spearman's rho correlations and ordered logit parameter estimates and odds ratios were computed using SPSS (version 28). Thresholds and category-specific effects were estimated; significance assessed via p-values and confidence intervals.

Correlation analysis (Spearman's rho, all p < 0.001): - Perception of government trust with voluntary compliance: ρ = 0.311 (p = 0.000). - Taxpayers' tax knowledge with voluntary compliance: ρ = 0.232 (p = 0.000). - Fairness of the tax system with voluntary compliance: ρ = 0.371 (p = 0.000). - Compliance cost with voluntary compliance: ρ = −0.381 (p = 0.000). - Rewards and incentives with voluntary compliance: ρ = 0.376 (p = 0.000). Ordered logistic regression (selected results): - Thresholds: [TPVC = 1] B = 3.04 (p = 0.000, 95% CI: 1.20, 4.71); [TPVC = 2] B = 5.93 (p = 0.000, 95% CI: 3.91, 7.60). - Perception of government trust (PGT): Several categories show positive, significant effects; e.g., Exp(B): 7.03 (p = 0.007), 3.98 (p = 0.001), 3.11 (p = 0.023); a higher category shows non-significance (Exp(B) = 1.61, p = 0.400). - Tax knowledge (TPTK): Positive, significant effects across most categories; Exp(B): 5.76 (p = 0.001), 6.70 (p = 0.000), 7.01 (p = 0.000); one higher category non-significant (Exp(B) = 3.11, p = 0.091). - Fairness of tax system (FTS): Positive, significant effects; Exp(B): 5.20 (p = 0.011), 4.00 (p = 0.013), 3.90 (p = 0.011), 2.79 (p = 0.044). - Compliance costs (CC): Negative effects with statistical significance for lower categories; reported Exp(B) values are negative (e.g., −0.117, p = 0.000; −0.238, p = 0.002; −0.340, p = 0.019), with the highest category non-significant (−0.443, p = 0.085). - Rewards and incentives (RI): Positive, significant effects; Exp(B): 4.407 (p = 0.000), 3.471 (p = 0.000), 7.907 (p = 0.000), 3.211 (p = 0.045). Overall: Voluntary tax compliance among large Ethiopian taxpayers is positively and significantly associated with government trust, tax knowledge, perceived fairness, and rewards/incentives, and negatively and significantly associated with compliance costs, corroborating H1–H5.

The findings address the research question by empirically validating that key theoretical drivers—fiscal exchange (benefits and rewards), social influence and comparative treatment (fairness), political legitimacy (trust), planned behavior (knowledge as perceived control), and economic deterrence (costs)—significantly shape voluntary tax compliance. Positive associations of trust, fairness, knowledge, and rewards align with expectations that taxpayers comply more when they perceive equitable treatment, trust the state, understand obligations, and see benefits. The negative association of compliance costs indicates that administrative and time burdens discourage compliance. These results underscore the policy relevance of enhancing transparency and accountability to build trust, strengthening taxpayer education to increase perceived control and understanding, ensuring equitable and consistent enforcement to boost fairness perceptions, and designing reward mechanisms to encourage compliant behavior, while streamlining procedures and reducing compliance costs to remove barriers.

The study contributes by integrating multiple theoretical perspectives to empirically explain voluntary tax compliance among large taxpayers in Ethiopia using an ordered logit model with survey data from 1550 respondents. It demonstrates that government trust, taxpayer tax knowledge, perceived tax system fairness, and rewards/incentives significantly and positively influence compliance, while compliance costs significantly and negatively affect it. Policy implications include: enhancing transparency and accountability in budgeting and public spending; directing tax revenues to visible, essential public projects; combating corruption among authorities; expanding taxpayer education via training, media, workshops, and seminars; engaging influential community figures to amplify outreach; and reducing compliance costs (e.g., simplifying procedures, lowering administrative burdens).