TAX COMPLIANCE AND THEIR PERCEPTION TOWARDS TAX FAIRNESS

AMONG STORE OWNERS IN EASTERN SAMAR STATE

PROPONENTS:

ANASARIAS, KIMBERLY SHANE B.

ARANETA, ALYSSA GWEN G.

MATIGA, MAEBELLE R.

ORAYA, KRISTELLE CIELLO E.

PARILLA, MARGARETTE PAULINE L.

CHAPTER I
 INTRODUCTION

Taxation is characterized as the power by which the authorities raises revenue to

defray the necessary expenses of the government. It is a bare way of distributing the cost of

government among those who in some measure are privileged to enjoy its benefits and must

also bear its burdens. However, tax compliance among SMEs (small and medium enterprises)

is poor (Atawodi and Ojeka, 2012)

Small and medium sized enterprises make up the vast majority of business entities

and contribute strongly to employment and economic growth, spanning the full breadth of

industries and sectors, and differing in their propensity to innovate and grow. At the same

time, SMEs face specific challenges in relation to their access to finance. The tax system

plays a dual role: at times, as a tool to aid in overcoming these challenges, and at others, as an

obstacle or hindrance (Bozdoğanoğlu, 2016).

Tax is an important stream of revenue for government’s development projects. The

Supreme Court of the Philippines described it as a “symbiotic” relationship whereby in order

for the people to get the protection they needed from the government, taxes must be paid.

Once taxes are not paid, the government will be paralyzed due to the lack of the

motive power to activate and operate it.

Compliance with tax laws is important to keep the system working for all and to

support the programs and services that improve lives. One way to encourage compliance is to

keep the rules as clear and simple as possible. Overly complicated tax systems are associated

with high evasion.

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According to Kim (2002), as cited by Gberegbe and Umoren (2017) in their book The

Perception of Tax Fairness and Personal Income Tax Compliance of SMEs in Rivers State,

researchers have identified that tax compliance is one of the most important factor that can

affect the perception of SMEs on tax fairness. It also plays a crucial role in tax reporting

behavior.

Tax fairness describes a system of taxation that is equitable for all taxpayers. Groups

focused on tax fairness look to limit the amount of tax legislation and rules that benefit one

segment of the tax-paying population over another.

In as early as 1776, Adam Smith has recognized the importance of tax fairness. His

thought about fairness was that a tax payer will want to contribute to the government based

on their ability to pay or the benefits that they will get from the tax funded projects and

programs of the government (Richardson, 2005) cited in the book The Perception of Tax

Fairness and Personal Income Tax Compliance of Smes in Rivers State of Gberegbe and

Umoren (2017). This means that individuals and corporations with greater incomes pay a

larger percentage of their income than low-income people or smaller businesses.

Since then, fairness is recognized as one of the attributes of a good tax system in

modern taxation (Tan & Chin-Fatt, 2000). Accordingly, tax payers who are not satisfied with

the treatment from tax authorities may hold resistance view (Trivedi, Shehata & Lynn, 2003,

Murphy, 2005, Ho & Wong, 2008) and may not be willing to pay their tax (Murphy 2003).
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Objectives of the Study

The study seeks to determine the factors that affect the tax compliance and their

perception towards tax fairness of store owners in ESSU.

The study aims to answer the following objectives:

1. Describe the profile of store owners in terms of:

1.1. Age

1.2. Sex

1.3. Marital Status

1.4. Educational Level

1.5. Experience in Business

2. Assess the extent of tax compliance among business owners in ESSU.

3. Determine the Perception of Tax Fairness of store owners in ESSU.

4. Correlate the tax compliance and the perception towards tax fairness of the

store owners in ESSU.

Scope and Limitations

This research study will be conducted in the City of Borongan, specifically in Eastern

Samar State University. The study is limited only to the owners of business enterprises such

as the store owners in ESSU’s Business Center and the private stores located alongside the

CAS building, as taxpayers, regardless of the size or classification of their business.

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Significance of the Study

The Government. The study will provide data or information concerning on how the

problems on tax compliance could be resolved based on their insight in the present tax

system. This could also serve as a guide in improving the tax system of the country so that

the taxpayers would be obligated to comply their responsibilities in paying tax which will

result to higher collection of revenue that will benefit the economy.

The Business Owners. The study will help them understand the moral obligations

behind tax payment and encourage them to responsibly obey their tax obligations. They

would be able to contribute in nation building by simply paying their taxes on time.

The Future Researchers. The study will serve as a useful source of data or information

and reference for future research endeavors. The study will also serve as a guide to future

researchers who might be willing to study more about tax compliance and tax fairness.

Definition of Terms

Tax. An amount of money that a government requires people to pay according to their

income, the value of their property, etc., and that is used to pay for the things done by the

government.

Taxation. Defined as the power by which sovereign taxes raises revenue to defray the

necessary expenses of government

Tax compliance. Taxpayers’ willingness to obey tax laws in order to obtain the

economy equilibrium of a country.

Tax Fairness. Describes a system of taxation that is equitable for all tax payers.
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CHAPTER II

REVIEW OF RELATED LITERATURE

Tax Compliance

The definition of tax compliance in its most simple form is usually cast in terms of the

degree to which taxpayers comply with the tax law. However, like many such concepts, the

meaning of compliance can be seen almost as a continuum of definitions. This ranges from

the narrow law enforcement approach, through wider economic definitions and on to even

more comprehensive versions relating to taxpayer decisions to conform to the wider

objectives of society as reflected in tax policy.

Taking the narrow end of the continuum first, one suggestion is that the degree of

noncompliance may be measured in terms of the ‘tax gap’. This represents the difference

between the actual revenue collected and the amount that would be collected if there were

100 per cent compliance. Andreoni, Erard and Feinstein (1998) include a time dimension to

compliance but are still mainly concerned with tax evasion as the central part of the tax gap

definition. As they put it: ‘A popular indication of the magnitude of evasion is the tax gap -

the difference between the federal income taxes households actually owe, and what they

report and pay voluntarily on a timely basis.’ Regarding time dimension, James (2000) states

that a tax payer might eventually pay his/her full liability but, if the payment is late, the

taxpayer cannot be considered to have been compliant. A more recent definition of

compliance by Brown & Mazur (2003) consists of three distinct types: payment compliance,

filing compliance and reporting compliance. However, these basic concepts of the ‘tax gap’

of non-compliance seem to be far too simplistic for practical policy purposes.

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Successful tax administration requires taxpayers to co-operate in the operation of a tax,

rather than be forced to undertake every aspect of their obligations unwillingly. The Internal

Revenue Service (IRS, 1996) has two definitions - gross tax gap and the net tax gap. The

gross tax gap is the amount of ‘true’ tax liability that is paid ‘voluntarily’ and on time and the

net tax gap is this amount less tax paid late or collected by the Internal Revenue Service

through enforcement activities. Both the gross and net tax gaps can be subdivided into the

three main components (Internal Revenue Service, 1996) - the non-filing gap, the under-

reporting gap, and the underpayment gap. The underreporting gap is in turn made up of three

elements - underreported income, overstated offsets and net arithmetical mistakes.

A major concern with such definitions is that they might be taken to indicate a

certainty in the measurement of tax compliance that does not exist. Tax law is not always

precise. Indeed, although legal definitions are often of the tax gap form, there are sometimes

practical difficulties of interpretation. Bergman (1998) elucidate that tax compliance ‘is what

the state assumes is legally owed by taxpayers, but the state and taxpayers do not necessarily

share the same interpretation’. The extent to which taxpayers dispute the meaning of the tax

law can depend on a number of things, including their basic willingness to comply with a tax

system. The basic concept of the ‘tax gap’ of non-compliance seems to be inadequate. The

‘tax gap’ definition and measure are far too simplistic for practical policy purposes since

successful tax administration requires taxpayers to cooperate in the operation of a tax system

rather than to be forced to carry out every aspect of their tax obligations. Tax law cannot cope

with every eventuality as said by James and Wallschutzky (1995) and therefore has to be

supplemented with supporting provisions.

Administrative procedures and decisions as well as appeal arrangements all have a

part to play but the tax system cannot work properly without a reasonable degree of willing
 7

compliance on the part of taxpayers themselves. There is the question whether ‘compliance’

refers to voluntary or compulsory behavior. If taxpayers ‘comply’ only because of dire threats

or harassment or both, this would not appear to be proper compliance even if 100 percent of

the tax were raised in line with the ‘tax gap’ concept of noncompliance.

Instead, it might be argued that successful tax administration requires taxpayers to

comply willingly, without the need for enquiries, obtrusive investigations, reminders or the

threat or application of legal or administrative sanctions. A more appropriate definition could

therefore include the degree of compliance with tax law and administration, which can be

achieved without the actual application of enforcement activity. This ‘voluntary’ aspect

appears in the definition supplied by Andreoni et al. (1998) which recognizes a basic

difference in terms of compliance between tax paid without direct enforcement activity and

tax paid as a result of it.

If taxes were considered to be intrusive or unfair, taxpayers might wish to reduce their

tax liability by working less. Even though this will have a cost to themselves that might be

outweighed by a feeling of revenge. It is also possible that taxes might be used as an excuse

to avoid unwanted overtime or other obligations. It is not known how powerful any spite

effects might be but it is clearly possible that, apart from the direct costs of compliance

themselves, difficulties in the willingness of taxpayers to comply might affect the revenue

potential itself. The ‘tax gap’ definition of non-compliance might then have been partly

satisfied because there is less to collect.

A fuller economic definition of compliance should also take into account other

possible economic effects of the tax system and its enforcement. There has been some

economic analysis of such possibilities. An example of this by Cowell (1985) who considered

the case where a worker can choose not just between working in the legal or illegal sectors
 8

but how much time to spend in work of any sort as opposed to leisure. It has also been

specifically shown that uncertainty in tax audits could affect labor supply according to

Horowitz & Horowitz (2000). It seems reasonable to conclude that tax administration could

reduce potential tax revenue by discouraging taxable economic activity. Paradoxically,

therefore, a severe tax enforcement policy could even claim to have improved tax compliance

by the narrow ‘tax gap’ definition because it would have reduced the amount there was to

collect. Timing issues will also affect the value of the potential revenue available. A taxpayer

might eventually pay his or her full liability but if it is paid late it cannot be considered to be

full compliance or worth as much as tax liability paid on time or even before the due date. In

economic terms, money in the future is worth less than the same nominal sum of money now.

If the Government does not receive tax payments on time it either increases the amount it has

to raise elsewhere or reduces the revenue available for public expenditure. Although late

payments of tax fit many of the ‘tax gap’ measures, they do not represent full compliance. As

already indicated above, tax compliance may be seen in terms of tax avoidance and tax

evasion. The two activities are usually distinguished in terms of legality, with avoidance

referring to legal measures to reduce tax liability and evasion to illegal measures. James

(2000) describes tax avoidance as the legal manipulation of an individual’s affairs in order to

reduce tax. Clearly tax evasion is a form of non-compliance.

However, if taxpayers go to inordinate lengths to reduce their liability, this could

hardly be considered ‘compliance’ either. Such activities might include engaging in artificial

transactions to avoid tax, searching out every possible legitimate deduction, using delaying

tactics and appeals wherever this might reduce the flow of tax payments and so on. ‘Tax

exiles’ even seem to prefer to emigrate rather than fulfill their obligations as citizens.
 9

Even if such activities are within the letter of the law, they are clearly not within the

spirit of the law. Compliance might therefore be better defined in terms of complying with

the spirit as well as the letter of the law. Many of the studies of compliance are concerned

with intentional noncompliance. There is, however, considerable scope for unintentional non-

compliance. Full compliance may require positive actions on the part of the taxpayer to

discharge his or her legal duties in full. It may be that taxpayers innocently fail to meet their

tax obligations because they fail to complete their tax returns correctly or are unaware of, or

misunderstand, various provisions of the tax system, or for similar reasons. As stated by

James et. al., (1987) and James, Sawyer & Wallschutzky (1998), attempts by different tax

authorities to improve tax administration in this respect have often found the problem of

assisting taxpayers more difficult than might at first appear.

Factors Determining Tax Compliance Behaviour

Jackson and Milliron (1986) listed fourteen main factors that have influenced tax

compliance as discussed by various researchers. These factors are age, gender, education,

income, occupation or status, peers’ or other taxpayers’ influence, ethics, legal sanction,

complexity, relationship with taxation authority (IRS), income sources, perceived fairness of

the tax system, possibility of being audited and tax rate. Various researchers have listed

factors that influenced tax compliance such as demographic, income, compliance cost, and

tax agents (Mohani, 2003), in addition to moral or ethical factors (Singh, 2003; Kasipillai et

al., 2003).

Other researchers (Sour, 2002; Keller, 1997; Trivedi, 1997; Hamm, 1995; Chang et al.,

1987)listed enforcement element factors (such as penalty, audit, and tax rates) as having a
 10

great influence on tax compliance behaviours. Tax compliance behaviours of a taxpayer

usually differ from the compliance behaviours estimated in economics models.

Taxpayers are greatly influenced by other taxpayers. Besides, the rate and quality of

audit will also influence tax compliance behaviours of a taxpayer (Trivedi, 1997).

Due and Friedlaender (1981) also state that a person’s preference for a tax may be

influenced if the tax- or an increase in it- is tied directly to the expenditures he strongly

favors. Generally, attitudes toward choice of taxes and tax structures are greatly influenced

by various criteria-often called principles- of taxation that have come to be widely accepted.

A comprehensive review of determinants of tax payers’ voluntary compliance with

taxation such as cultural background of tax payers, their awareness level, fairness/equity, tax

payers’ attitude towards government, socio-political factors, organizational strength of tax

authority, will be touched. The empirical work of various researchers and other reference

materials are scanned to have basic conceptual framework of the subject matter.

Cultural Factors

Culture is considered to be a powerful environmental factor that affects the taxpayer’s

compliance. Different social norms and ethical values will create different incentives for tax

compliance.

In fact, ethical values influenced by social norms may prohibit taxpayers from

engaging in tax evasion (Blanthorne and Kaplan, 2008). The cultural framework most widely

used is that of Hofstede (1980). Based on an attitude survey of about 116,000 employees,

Hofstede identifies four underlying societal values; individualism, power distance,

uncertainty avoidance and masculinity. Cultural research has found significant differences

between the US and Chinese citizens (Hofstede, 1991).

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The cultural dimension affecting tax compliance is collectivism and individualism as

suggested by Chan et al. (2000). In Hofstede's model, individualism and collectivism refer to

the degree of interdependence a society maintains among individuals (Hofstede, 1991).

The cultural dimension of individualism relates to the degree of integration a society

maintains among its members. A high individualism culture is signified by people focusing

on themselves rather than on the group to which they belong. Under this perspective, an

individual is seen as separable from and independent of a group affiliation. People in such

low individualism culture as Chinese citizens, they tend to be collectivists who are expected

to follow and subscribe to the values of their in-groups in order to gain peer acceptance and

social status (Hofstede, 1991). In contrast, a high individualism culture such as US citizens is

signified by people focusing on themselves rather than on the group to which they belong.

Under this perspective, they view themselves as distinct entities and place great value on

individual rights. These cultural differences may have a direct impact on ethical values and

moral development and ultimately affecting tax compliance decisions.

The study conducted by Chan et al. (2000) indicates that culture of the taxpayers has

an impact on taxpayer compliance efforts. There is reason to believe that societal reasons

may account for the way taxpayers behave. While tax evasion may be considered wrong and

immoral in some societies, it may be regarded as socially tolerable in other (Schwartz and

Orleans, 1967; Ekstrand, 1980; warneryd and walerud, 1982).

In countries with a tradition of high compliance with tax law; few tax payers would

attempt tax evasion strategies. However, empirical evidence seems to suggest that tax payer

compliance with the law is influenced by their perception about whether or not other tax

payers are complying (Van den Doel, 1979; laver, 1981; lewis, 1982), especially when they
 12

fell that the taxes they pay are intended for worthy purposes (oldman, 1965; dean, keenan and

kenney, 1980).

In Ethiopia where the system of government has evolved from feudal (where taxes

were used by individuals in government) to current one, it is obvious that negative attitude

towards tax has been developed in the society. In this sense it is difficult to conclude that

there is a culture in the country that appreciates voluntary compliance.

Social Factors

The issue of (non-) compliance is not only a question of state-society relationships but

also a question of relationship between citizens and/ or groups of citizens within local

communities. There is an existing social bond between the society and this bond influences

the members of the society in complying with the tax law. That is taxpayers may be

influenced by their peer groups to comply or not to comply with the tax law. Peers are usually

referred to taxpayers’ associates and include friends, relatives and colleagues (Jackson and

Milliron, 1986). The peer influence is reflected in an individual’s expectations in relation to

the approval or disapproval of that tax noncompliance behavior.

Sanvely (1990) said that compliance behavior and attitude towards the tax system is

affected by the behavior of an individual’s reference group such as relatives, neighbors, and

friends. Thus if a tax payer knows many people in groups important to him who evade taxes,

his commitment to comply will be weaker. On the other hand, social relationship may also

help deter individuals from engaging in evasion for fear of social sanctions imposed once

discovered and revealed publicly (Grasmick and Green, 1980; Grasmick and Scott, 1982).

The survey conducted by Mason et al. (1975) finds that people committing tax

noncompliance are more likely to discuss tax matters with their peers. The study conducted
 13

by Chan et al. (2000) also reveals that taxpayers may still commit noncompliance so long as

this noncompliance is consistent with in-group expectations and norms.

As cited by Slemrod (2000) and Levi (1998) in (Fjeldstad and Ranker, 2003), the

dimension of trust that seem to affect compliance is trust in other citizens to pay their share of

service charges. In particular, trust in other citizens to pay their share seems to be important.

The larger the fraction of the local population that is observed not paying, the lower

perceived risk of being prosecuted. This has impacts on the individual taxpayer’s perception

of the credibility and trustworthiness of the revenue administration.

Is non-Compliance an Intentional Behavior?

Most theories of tax compliance, as well as empirical works (Smith and Kinsey, 1987) have

until recently been premised on the assumption that tax under reporting is an intentional

behavior. Behavior that is unintentional has either been ignored or set aside in a footnote or

can be safely ignored as random noise.

However, as noted earlier, the evidence is accumulating that unintentional

noncompliance is neither small nor inconsequential. Nor it is necessarily random in nature.

As far as Ethiopia’s practice is concerned tax non-compliance is not only an intentional

behavior it is also attributed to lack of ability to pay, lack of awareness and weak institutional

capacity of the revenue administrations and other factors.

The Relevance of Understanding Tax Compliance

James et al (2003) said that a number of tax authorities have been moving towards a

more sophisticated approach to tax compliance. Traditionally there seems to have been an

assumption that with a basic level of assistance for taxpayers, together with an enforcement
 14

program, tax compliance could be expected to be maintained at satisfactory levels. However

there seems to have been a shift in attitudes towards treating the taxpayer less as a passive

donor who simply has to be billed for taxes due and more as a customer sometimes requiring

particular forms of assistance and support.

On Lemessa (2005) statement, when compliance is not achieved on a voluntary basis,

revenue authorities must identify and address the risk associated with non-compliance by

developing strategies targeted at those risks. Voluntary compliance is maximized when

revenue authorities are aware of major developments and trends in the business and

legislative enforcement, and are responsive to their implications on tax administration and

compliance.

The choice between compliance and non-compliance may only be a matter of

opportunity, convenience, or even interpretation of the law (Smith and Kinsey, 1987). Legal

validity, economic and social purpose, distributive justification, and revenue yield may all be

defeated if a tax is not levied and collected well. No matter what the justifications advanced,

a tax fails to the extent that it is avoided or evaded (Shultz and Harriss, 1949).Taxation is an

inevitable phenomenon in any economy or nation as far as services and other roles are

expected from governments. Even though the history of taxation is as old as that of states or

governments, still there are gaps in every nation, particularly underdeveloped countries like

Ethiopia as far as voluntary compliance is concerned. Taxes are considered by many citizens

as necessary evils that cannot be avoided under normal conditions. Hence, the issue of

voluntary compliance is a central idea when dealing with efficiency and effectiveness of a tax

system. From the above review of literature several writers have discussed about factors that

affect voluntary compliance behavior and how it is related with various socio-cultural,

political legal and administrative aspects.

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Legal enforcement (i.e. penalties and sanctions) are all exist in the tax laws of every

nation in varying degrees. But still are gaps in tax compliance regardless of these laws. This

clearly shows that tax compliance cannot be ensured only through enforcement or stick

approach. Even though the existence of enforcement and penalties cannot be undermined

when dealing with tax compliance, focusing on positive side i.e. encouraging voluntary

compliance is by far rewarding as far as long lasting and consistent advantage is concerned.

Hence, the understanding of tax compliance that is why people tend to comply and why they

tempt to evade, gives a clear road map to the solution of this very classical problem in

varying degrees. But still are gaps in tax compliance regardless of these laws.

This clearly shows that tax compliance cannot be ensured only through enforcement

or stick approach. Even though the existence of enforcement and penalties cannot be

undermined when dealing with tax compliance, focusing on positive side i.e. encouraging

voluntary compliance is by far rewarding as far as long lasting and consistent advantage is

concerned. Hence, the understanding of tax compliance that is why people tend to comply

and why they tempt to evade, gives a clear road map to the solution of this very classical

problem.

Fairness/Equity

As explained by Bhatia (1976), a good tax system, in order to achieve various

objectives, chooses and adheres to certain principles which become its characteristics. A good

tax system, therefore, is one which is designed on the basis of an appropriate set of principles,

such as equality or fairness and certainty. Since fairness of a tax system is its corner stone a

brief overview can be presented in the following paragraphs.

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As said by James (2000), the most obvious requirement of equity or fairness is to treat

equal people in equal circumstances in an equal way. The problem here is in deciding who is

equal to whom. Similarly, Due and Friedlaender (1981), also argue that what is fair or

equitable in taxation is inevitably a value judgment; no scientific specification of an equitable

distribution pattern is possible, or people may be equal income wise while they may be

unequal regarding their expenditure, wealth, total utility and so on. Such a pattern can be

specified only on the basis of a consensus of attitudes of persons in the contemporary society.

Lemessa (2005) also adds that a major responsibility is to ensure that all taxpayers dealt with

by a given official are accorded similar treatment and that all officials dealing with a given

tax payer would accord the same treatment. Suchlike, Brooks (2001) states that fairness has

always been widely regarded as the most important criteria in judging a tax system. The

problem of unfairness is that a tax system allows taxes to be shifted from dishonest to honest

tax payers. The fairness of a tax system may also be perceived in different ways by the

taxpayers and tax authorities. What is fair in the eye of the tax authorities may not have the

same image in the mind of the taxpayers.

Bhatia (1976) also stated that the attitude of taxpayers is an important variable

determining the contents of a good tax system. It may be assumed that each taxpayer would

like to be exempted from taxpaying, while he would not mind if others bear that burden. In

any case, he would want his share to be within the general level of tax burden being borne by

others. If this is not so, he will feel exploited.

Due and Friedlaender (1981) have argued that persons will oppose taxes that they feel

strike them “unfairly” and allow others to escape a “reasonable” burden, and they will favor

taxes they accept to concentrate on others, especially when “others” are non-humans such as

corporations. To sum, regardless of this inherent problem ensuring the fairness or equity of a
 17

tax system is second to nothing. To put it differently, it is essential that a good tax system

should appear equitable to the tax payers.

Organizational Strength of Tax Authorities

No tax will work effectively, unless its administrators maintain an aggressive attitude

with respect to the correctness of the taxpayers’ actions. Some taxpayers will fail to file or

make mistakes through ignorance or neglect; others will deliberately cheat as said by Bird

and Oldman (1967). A passive attitude by the authorities towards these errors and

falsifications will soon undermine the entire structure, since the diligent and honest taxpayers

will almost in self-defense be forced to the level of the careless and dishonest. A tax

administration which seeks compliance must protect those who comply or else compliance

will not be forthcoming. Most commentators, policy makers, and tax administrators agree

that voluntary compliance would be greatly facilitated by the existence of a simplified tax

structure.

Indeed, without institutional simplification that enables tax payers to fulfill their

responsibilities more effectively, even the most elaborate service offered to tax payers by the

tax administration would be lost in a sea of confusion, waste, and widespread disrespect of

the law (Bahl, 1989; Jenkins, 1992). A simpler tax structure will make it easier for tax payers

to assess their tax liability and thus comply more fully with tax laws.

Bird and Oldman (1967) further explained that the sure sign of ineffective tax

administration is the presence of a very large delinquency in tax payments for it indicates the

lack of taxpayer respect for the tax system. The taxpayer in effect is acting on his belief that

the administrative machinery may bark, but that it has no bite. These writers argue that in

large part the solution for the large delinquency lies in providing the bite. In this sense
 18

effective tax collection is a facet of the larger problem of providing adequate penalties, to

which reference will later made. In other words tax is evaded to the extent that tax authorities

are perceived as weak by taxpayers. A tax system doesn’t function in a vacuum. Its

relationship with at every turn are with the public, and since the combination of taxes reaches

nearly every individual in one way or another, the administration finds itself dealing with the

nation as a whole. Hence, inevitably its operations and effectiveness are affected by the

attitudes of the nation towards the tax system (Bird and Oldman, 1967).But while tax

administration is thus affected by these national attitudes (Bird and Oldman, 1967); it is

equally true that the attitudes can in turn be affected by tax administration.

Rational and efficient procedures, higher personnel standards, better management,

improvement in relation with the public and in the daily contacts between tax official and

taxpayer, can operate to increase the public respect for the tax administration. Moreover, once

the tax administration has been placed on a sound basis, it is in a position to assert that

compliance must be forthcoming. Such an assertion would hardly be tolerated or even taken

seriously, as long as tax officials were themselves inefficient and corrupt. But if the

administration has brought stability and honesty to its own operations, the self-respect thus

achieved can form the foundation for its demand of respect and compliance from the tax

payer.

As reported by Lemessa (2005), tax systems that depend on ad hoc administrative

procedures rapidly become discredited and endanger compliance. To encourage compliance it

is equally important that tax authorities administer the law fairly. This implies both an

absence of arbitrary or corrupt behavior on the part of the officials, and “normative standards”

to ensure that the same laws are applied and administered in a standard fashion across the

board. A taxpayer (Peacock and Forte, 1981) will be more receptive to information on his
 19

obligation if, in his efforts to comply, he receives a reasonable degree of service from the

revenue administration.

Poorly drafted forms, long waiting lines and even charges for acquiring them,

bureaucratic hassle in processing the case, rudeness from the officials, cumbersome appeal

procedures, and the like, can repel even the most loyal taxpayers.

On the other hand the ways in which revenue authorities interact with taxpayers and

their own employees have an impact on public perception of the tax system and the degree of

voluntary compliance. Taxpayers who are aware of their rights and expect, and in fact receive,

a fair and efficient treatment are more willing to comply. Voluntary compliance is promoted

not only by an awareness of rights and expectations of a fair and efficient treatment but also

by clear, simple and “user friendly” administrative systems and procedures. Voluntary

compliance is enhanced when it is easier for taxpayer to do so.

Awareness level of Taxpayers

James (2000) argues that the norm is usually to comply rather than not to comply. As

already pointed out for a tax system to be effective the majority of the taxpayers have to

comply. It follows that there may be greater gains in assisting basically compliant taxpayers

to meet their fiscal obligations than in spending more resources in pursuing the minority of

non-compliers.

Many taxpayers might be willing to comply in full, but are unable to do so because

they are not aware of, or do not understand, their full obligations. Even if such tax payers

understand their obligations, they may not know how to meet them or may be unable to do so

for other reasons. On other side, other writers such as Smith and Kinsey (1987) argue that tax

non-compliance is an intentional behavior.

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In countries like Ethiopia where most of the business community have no access to

information, lack of awareness cannot simply be overlooked rather it can be assumed as a

major determinant of tax compliance behavior.

Taxpayers Attitude towards the Government

The presence of government expenditures may motivate compliance (Alm, Jackson,

and Mckee, 1992; Andreoni, et al., Cowell and Gordon, 1988). Individuals may pay tax

because they value the goods provided by the government, recognizing that their payments

are necessary both to help finance the goods and services and to get others to contribute. A

tax payer therefore is seen as exchanging purchasing power in the market in return for the

government services (Levi, 1988). Positive benefits may increase the probability that tax

payers will comply voluntarily, without direct coercion. Without a material benefit,

compliance becomes less assured. Although most tax payers cannot assess the exact value of

what they receive from the government in return for taxes paid, it can be argued that they

have general impressions and attitudes concerning their own and other’ terms of trade with

the government (Richupan).

It is then reasonable to assume that a tax payers’ behavior is affected by his

satisfaction or lack of satisfaction with his terms of trade with the government. Thus, if the

system of taxes is perceived to be unjust, tax evasion may, at least partly, be considered as an

attempt by the tax payer to adjust his terms of trade with the government. Wahlund (1992)

also stated that tax compliance is related to political affiliation that is people favoring parties

with social democratic values tend to comply more than people voting for liberal parties.

Due and Friedlaender (1981), also argue that, attitudes toward the general level of

taxation and tax increases are dependent, of course, on attitudes about the desirability of
 21

governmental programs and on attitudes toward the government itself . On the other hand,

(Fjeldstad, 2004) citizens’ willingness to pay taxes voluntarily rests on the local

government’s capacity to provide services and its demonstrated readiness to secure the

compliance of the otherwise non-compliant.

Fairness and Taxation

Taxation has to be in accordance with the notion of fairness that exists in the

society; otherwise the result would be a loss of legitimacy. Fairness can be

distinguished between procedural justice and substantive justice. Where procedural

justice concerns justice in legal decision-making processes, fairness of the income tax

focuses mainly on the substantive justice, which means a focus on the substantive

criteria of tax law. Substantive justice in turn can be distinguished in social-political

justice and legal justice.

Radbruch, said that justice is the ultimate value. This means that tax laws should

aim to realize justice. Laws should be intended to realize justice, even if they are not

able to achieve this noble aim.

 22

CHAPTER III

METHODOLOGY

This chapter deals with the set of methods or process that the researchers’ will be

using to obtain the needed data for the study. It contains the research design, locale of the

study, respondents of the study, sampling procedure, research instrument, measurement of the

variable, data gathering procedure, data analysis, and the statistical tool to be used.

Research Design

This study is a quantitative type of research. It is correlational in nature. It aims to

know the factors that affect the tax compliance of store owners. In addition to this, the study

also aims to find out the perception of store owners towards tax fairness.

Locale of the Study

Figure 1. Map of Eastern Samar State University

 23

As shown in Figure 1, the study will be conducted at Eastern Samar State University-

Main located at Borongan City. The study focuses only on stores in ESSU-Main Campus

specifically in the Business Center and the private stores alongside the CAS building.

Respondents of the Study

There are twenty-four (24) stores in Eastern Samar State University. The owners of

these stores as taxpayers will be the respondents to the researchers’ questions about the study.

Sampling Procedure

In this study, we will be utilizing purposive sampling so that we could make use of all

the data we have gathered efficiently. The respondents we will select would be based on their

accumulated experience when it comes to paying their taxes. Hence, being capable of

answering our questionnaire with outmost capability.

Research Instrument

The instrument to be used is going to be survey questionnaires which will be given

out to the selected business owners. The questions that could be included will tackle mainly

to those related to our objectives.

Measurement of Variable
 The researchers of this study will be using two out of four levels of measurement to

identify the measurement of the variables. First, the nominal level as our questionnaire will

include several questions that don’t imply any ordering among the possible responses.

Second, ordinal level as our research aims to measure the respondents’ perception on tax

fairness.

Data Gathering Procedure

The researchers will personally distribute survey questionnaires with everything the

researchers want to ask will be given out to the chosen respondents which are the business

owners and all their answers and response will be recorded.

Data Analysis

After gathering all the completed questionnaires from the respondents, total responses

for each item will be obtained and tabulated.

28

Statistical Tool

Chi Square

This will be used to determine the differences between the actual result and

the expected result of the study.

Formula:
 2
(𝑜 − 𝑒)2
𝑥 =∑
𝑒

To calculate chi square, we take the square of the difference between the

observed (o) and expected (e) values and divide it by the expected value.

Eastern Samar State University

Senior High School Department
Province of Eastern Samar
Maypangdan, Borongan City

FACTORS AFFECTING THE TAX COMPLIANCE OF STORE OWNERS IN

EASTERN SAMAR STATE UNIVERSITY AND THEIR PERCEPTION TOWARDS
TAX FAIRNESS

Name (Optional):________________________________________ Date:________________

DEMOGRAPHIC CHARACTERISTICS OF RESPONDENTS

Please circle the number that appropriately represents your response in each of the following

questions.

A. Gender:

1. Male

2. Female

B. Age:

1. Less than 20

2. 20-29

3. 30-39

4. 40-49

5. 50-59

6. 60 and Up

C. Marital Status:

1. Single

2. Married

3. Widowed

4. Others ______

D. Level of Education:
 1. Elementary

2. High School

3. College

4. Graduate

5. Others ______

E. Experience in business

1. 1-5 years

2. 6-10 years

3. 11-15 years

4. 16-20 years

5. More than 20 years

TAX FAIRNESS

Please respond by putting a one check in each line across as to how you feel about income taxes and

the income tax system.

1. Strongly Disagree 2. Disagree 3. Either Agree or Disagree 4. Agree 5. Strongly Agree

1 2 3 4 5

1 Generally, I feel the income tax is a fair tax

2 On the whole, the burden of income taxes is fairly distributed

3 I believe the income tax system is the fairest kind of system that

the government could use to collect revenue

4 Current tax laws don’t require me to pay more than my fair

share of income taxes

5 Compared to other taxpayers, I don’t pay less than my fair

share of income taxes

6 Special provisions in the income tax law that apply to only a

few people are fair

7 Some perfectly legal tax deductions are not fair because only

the wealthy are in position to use them

8 High income earners have a greater ability to pay income taxes,

so it is fair that they should pay a higher rate of tax than low

income earners.

9 It is fair that high income earners pay proportionately more tax

than low income earners.

10 A fair tax rate should be the same for everyone, regardless of

their income:

11 The share of the total income taxes paid by high income earners

is not too high

12 Middle income earners don’t pay more than a fair share of the

income tax burden

13 The share of total income taxes paid by middle income earners

is not too high

14 Compared to the amount paid by more wealthy taxpayers, I

don’t pay more than my fair share of income taxes

15 I get fair value for my income taxes in terms of benefits

received from government

16 I get fair value for my income taxes in terms of benefits

received from government

17 Benefits I receive from government in exchange for my income

tax are reasonable.

TAX COMPLIANCE

Please respond by putting a one check in each line across as to what is your level of tax compliance.

1. Never Do 2. Probably Not Do 3. Either Do or Not Do 4. Probably Do 5. Definitely Do

1 2 3 4 5

1 I declare actual income received from all sources to the BIR

2 I keep records/documents pertaining to income and

expenditure for a period of seven years after submission of the

Tax Return.

3 I pay my tax obligations correctly.

4 I pay my tax obligations on time.

5 I have no problem in complying with my tax obligations.

6 I am fully satisfied with all tax requirements imposed by the

BIR.

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