Tax non-compliance is a global issue, significantly impacting revenue generation in developing countries like Ethiopia. The gap between potential and actual tax revenue is exacerbated by ineffective tax administration and taxpayer behavior. This study investigates the determinants of voluntary tax compliance in Ethiopia, focusing on large taxpayers. The research explores various theoretical frameworks to understand the factors influencing compliance, including the economic deterrence model, the fiscal exchange theory, social influence (specifically comparative treatment theory), political legitimacy theory, and the theory of planned behavior. These theories posit that factors such as tax rates, penalties, the likelihood of detection, the provision of public goods, social norms, trust in the government, taxpayer knowledge, perceived fairness of the tax system, and compliance costs all play a significant role in shaping taxpayer behavior. Previous research on these factors in Ethiopia has yielded inconsistent results, highlighting the need for further investigation. This study aims to address these inconsistencies by employing a robust methodology and examining the influence of these factors within the context of the Ethiopian tax system. The ultimate goal is to identify practical policy recommendations to enhance voluntary tax compliance in the country.

Existing literature on tax compliance offers diverse perspectives. Some studies emphasize the economic deterrence model, focusing on penalties and the probability of detection to deter non-compliance. Others highlight the fiscal exchange theory, suggesting that providing public goods and services in return for taxes fosters compliance. Social influence theories focus on the impact of social norms and perceived fairness, while political legitimacy theory emphasizes the role of trust in government. Finally, the theory of planned behavior suggests that attitudes, subjective norms, and perceived behavioral control influence compliance. However, previous studies on tax compliance in Ethiopia have produced mixed results regarding the impact of variables like tax fairness and knowledge, creating a need for this study to reconcile these conflicting findings and add to the existing body of knowledge.

This quantitative study employed a survey to collect data from 1550 large taxpayers in Ethiopia. A closed-ended questionnaire with a 5-point Likert scale was used to measure variables like government trust, taxpayer tax knowledge, tax system fairness, compliance costs, and rewards. The data analysis relied on an ordinary logit regression model, chosen because the dependent variable (tax compliance) is categorical. Spearman's rho correlation test was initially used to assess the relationships between variables before the regression analysis. The ordinary logit model allowed for the estimation of the probability of different levels of tax compliance (low, medium, and high) based on the independent variables. The model estimated the parameters using the equation: TPVC = β0 + β1RI + β2FTS + β3PGT + β4TPTK + β5CC + ε, where TPVC represents Taxpayers' Voluntary Compliance, RI represents Rewards and Incentives, FTS represents Fairness of the Tax System, PGT represents Perception of Government Trust, TPTK represents Taxpayers' Tax Knowledge, CC represents Compliance Costs, and ε represents the error term. The odds ratio (Exp(B)) was used to interpret the significance and direction of the impact of each independent variable on tax compliance.

Spearman's rho correlation analysis revealed significant positive correlations between voluntary tax compliance and government trust, taxpayer tax knowledge, tax system fairness, and rewards and incentives. A significant negative correlation was found between compliance costs and voluntary tax compliance. The ordinary logit regression model confirmed these relationships. The odds ratios showed that higher levels of government trust, tax knowledge, perceived fairness, and rewards and incentives were associated with a significantly higher likelihood of higher levels of voluntary tax compliance. Conversely, higher compliance costs significantly decreased the likelihood of higher voluntary tax compliance. Specifically, the odds ratio for government trust, ranging from 7.03 to 3.11 depending on the level of trust, indicated a strong positive association. Similarly, odds ratios for tax knowledge ranged from 6.70 to 3.11, demonstrating its positive effect. Fairness of the tax system showed odds ratios between 5.20 and 2.79, while rewards and incentives exhibited odds ratios between 7.907 and 3.211, all indicating positive and significant influences on compliance. In contrast, the odds ratios for compliance costs, ranging from -0.117 to -0.443, confirmed their negative influence. The findings strongly support the hypotheses that government trust, tax knowledge, fairness, and rewards positively affect compliance, while compliance costs negatively affect it.

The study's findings provide valuable insights into the drivers of voluntary tax compliance in Ethiopia. The significant positive influence of government trust underscores the importance of building public trust in government institutions. Taxpayer tax knowledge proves crucial, supporting the role of tax education and awareness programs in promoting compliance. The positive impact of perceived fairness highlights the importance of equitable and transparent tax systems. The positive effect of rewards and incentives supports the fiscal exchange theory, emphasizing the role of government services and benefits in motivating taxpayers. The negative effect of compliance costs aligns with economic deterrence theory, showing that high costs discourage compliance. These results offer valuable information to policymakers in Ethiopia and other developing countries, showcasing the intertwined nature of economic, social, and political factors in shaping tax compliance behavior. The findings are consistent with several theoretical perspectives discussed in the introduction, providing empirical support for these theoretical models within a specific developing country context.

This study provides strong evidence that government trust, taxpayer tax knowledge, perceived fairness of the tax system, and the provision of rewards and incentives are crucial factors in enhancing voluntary tax compliance in Ethiopia. High compliance costs, conversely, hinder compliance. To improve voluntary tax compliance, the Ethiopian government should focus on enhancing transparency, accountability, and combating corruption within the tax system. Investment in tax education and awareness campaigns is essential. Finally, simplifying tax procedures and reducing compliance costs are vital. Future research could investigate the relative importance of these factors across different taxpayer segments or explore the long-term effects of policy interventions aimed at improving voluntary tax compliance.

The study's limitations include its cross-sectional nature, which restricts causal inferences. The reliance on self-reported data may introduce bias. The focus on large taxpayers limits the generalizability of the findings to other taxpayer groups. Future studies could address these limitations through longitudinal designs, use of multiple data sources, and expansion to a broader range of taxpayers.