Role of tax education in tax compliance behaviour

Sustainable growth of tax revenue is the major concern of policymakers in formulation of a fiscal strategy of a country. This concern becomes more serious for those countries that are facing a budget deficit. Major international organisations call on governments to strengthen and increase effectiveness of their tax systems for generating domestic resources for meeting the Sustainable Development Goals (SDGs) and promoting inclusive economic growth. Taxation pundits have asserted that an effective taxation system is the bedrock of sustainable development. For taxation to be used as a way of financing sustainable development there is a need to instill a culture of sustainable tax compliance into the citizens of a state. Tax compliance is defined as the ability and willingness of taxpayers to comply with the tax laws by declaring correct income with the payment of the right amount of tax within the prescribed time limit. Tax compliance is the degree to which a taxpayer gratifies to tax rules and regulations. Whereas, voluntary tax compliance is the readiness of a taxpayer to abide by the tax laws, especially without any enforcement measures taken by the tax authority.

Around the world tax authorities are facing the challenges of financial management due to a narrow tax base resulting in poor performance in the collection of tax revenue. The collection of tax revenue primarily depends upon the compliance of the taxpayers. There is a direct relationship between taxpayer’s compliance level and the collection of tax revenue by the state. The higher the degree of compliance to tax laws by the taxpayers, the higher will be tax collection. In contrast, non-compliance is basically an attitudinal tendency of a taxpayer which may lead to tax behavior in the form of tax avoidance or tax evasion. For promoting the tax culture, there is a need to discourage the behavioral inclinations of taxpayers towards tax avoidance or tax evasion. According to the psychological theory of attribution, behavior is influenced by internal and external factors. Behavior influenced by internal factors is believed to be under the personal control of an individual. Behavior is also influenced by the external environment which comes within the ambit of external factors. Therefore, the psychological biases due to internal and external factors are required to be reduced to make an individual complying with the laws of the state. In this context, tax administration in various countries has been increasingly using different techniques of economic psychology to analyse the behavior of citizens for improving tax compliance. For that purpose, behavioral economics helps the tax administration to understand the determinants of taxpayers’ compliance and improve their engagement in tax affairs.

Recent years have seen the popular trend of using “nudges” with the aim to improve individual behavior. Nudge techniques based on behavioral insights are widely used in the field of taxation to encourage correct tax behavior. The behavioral insight approach is based on the idea that low-cost interventions are made with the aim to encourage people to make better choices for themselves and for society. For example, if the objective of a particular tax is to discourage certain behavior such as the use of tobacco or consumption of junk food on health grounds, then the compliance will lead to change in the behavior of whole society. Similarly, a small shift in behavior can lead to significant additional revenue.

The carbon tax is another important example to check the negative tendencies of society by realising the dangerous consequences of emission of poisonous gasses by industries and vehicles on road. This tax induces the citizens to use energy-efficient techniques. A carbon tax is a sort of pollution tax with the goal of environmental protection. This tax aims to make the hidden social cost of carbon emission more visible which is otherwise felt in other indirect ways like global warming. Changing the deportment of the citizens of the state requires constant pursuance of tax authorities involving behavioral insights for improving compliance behavior. Recently, an OECD report has highlighted the significance of behavioral insights for better tax administration. The report includes the strategic considerations as well as various interventions employed by behavioral scientists to improve tax compliance.

For sustainable tax compliance of taxpayers, it requires an environment where taxpayers have appropriate knowledge of their roles and responsibilities. Several empirical studies have confirmed that there are positive effects of tax education on tax revenue growth. Taxpayer education includes initiatives aimed at building a culture of tax compliance by taxpayers teaching about various aspects of tax like tax obligations, the significance of meeting tax deadlines, etc. Tax education and enlightenment have a consequential effect on the taxpayer’s understanding of the tax laws and tax compliance. Tax literacy helps people to learn more about the tax provisions that will legitimately reduce their tax liability or avoid the late filing of returns that might cause them to incur fines or penalties. The role of electronic media, including television and radio, is very significant in broadcasting tax enlightenment programmes. Seminars in schools and colleges also play a remarkable role by edifying young generations the importance of tax revenue for sustainable development of the country. More awareness outlets on the radio, television, and other mass media can achieve greater cooperation of taxpayers by affecting tax morale and tax compliance. Door-to-door tax education and enlightenment not only lead to increased tax compliance but also to broadening of the tax base.

In a nutshell, it is imperative on the part of the state machinery to work to achieve the widespread social acceptance of the tax system without which the system cannot be applied in a holistic manner. For that purpose, behavioral insights are very important to study for making changes in the behavior of taxpayers. There is a need to make people realise to change their behavior to produce better outcomes for themselves and for society. The type of faith is required to be inculcated that tax is an obligation to be paid for, so that the poor may get benefits and misrepresentation of tax liability is a crime. Taxpayer compliance behavior can be corrected, if it is analysed through the lenses of the theory of attribution, equity theory, social exchange theory, intrinsic motivation theory, and optimal tax theory. Taxpayer’s education is an important factor in creating a taxpaying culture. Educational and enlightenment campaign at national level will not only improve the tax compliance of the existing taxpayers but also help to build up future taxpayer’s generation having proper mindset towards taxes.—-Dr Faisal Asghar (The writer is a PhD in Economics)