How can tax compliance be incentivized? An experimental examination of voice and empathy

Abstract

PurposeTax evasion is an economic crime that nearly all world countries suffer from. Its consequences are countless, including poor public spending on infrastructure projects and social welfare programs, low economic growth and development, institutional mistrust and fiscal deficits. For developing countries in particular, targeting development programs and infrastructural investments requires an efficient tax collection policy to generate sufficient funds for such purposes. This makes the tax evasion problem a critical one and countering it extremely policy relevant. Based on evidence that shows how the understanding of taxpayers' behavior is an essential factor in fighting evasion, this paper aims to test different factors that might incentivize citizens using a behavioral and experimental approach, in non-Western educated industrialized rich democracies (non-WEIRD) countries, to comply more.Design/methodology/approachThis paper uses a survey experiment to examine the impact of different behavioral primes on tax compliance behavior. Specifically, it observes subjects' compliance behavior in two contexts: voice and empathy. A total of 273 students from a big public university in Egypt were randomly selected to participate in this study.FindingsIn the “Voice” treatment, the explanatory variable (VOICE) was found statistically significant, thus confirming the hypothesis that democracy, through having a voice in the decision-making process, affects compliance positively. As for the “Empathy” treatment, the explanatory variable (EMPATHY) was also found significant. This confirms the second hypothesis that triggering feelings of empathy, through highlighting the good cause behind public spending that uses taxpayers' money, affects compliance behavior positively.Research limitations/implicationsDespite the fact that the experimental methodology is a methodology with high internal validity, examining the impact of a specific intervention on behavior, a replication of the experiment in other contexts might be useful in increasing the external validity of the findings. Specifically, conducting this experiment on a nonstudent sample might lead to even more powerful results by increasing the ecological validity of the results.Practical implicationsThis study advocates a more behaviorally informed public policy. Specifically, Egyptian policymakers are recommended to adopt behavioral nudges as a complement to existing policies. The authors believe the findings, if confirmed by repeated experiments (lab, lab-in-the-field and rational choice theories on both student and non-student samples) in a number of Arab countries, might also help in offering cost-effective nudges for the Arab world policymakers, where culture and the political context are to a great extent similar.Social implicationsThe findings of the study have a number of social implications. Higher tax compliance will enable higher levels of public spending on a number of social targets such as education, health and welfare programs.Originality/valueWhile the study builds on recent research examining how to incentivize tax compliance, it simultaneously seeks to make three contributions. First, the study design aims to apply recent advances in behavioral sciences (impact of voice and empathy) in a policy area that has not seen much use of such interventions in the Egyptian context (i.e. tax compliance). Second, the study is policy relevant in the sense that it aims to increase the effectiveness of existing government policies by complementing them with behavioral primes. Third, there is nearly no literature found applying this topic in a non-WEIRD country such as Egypt.

The formalization of the Egyptian informal sector: a behavioral and experimental approach

“…It was found that the default assignments succeeded in changing the employees' spending and savings attitude (Blumenstock et al, 2018). In the same vein, an experimental approach testing the impact of two behavioral primes on tax compliance behavior: 1) having a voice in the allocation of tax, 2) triggering empathy in public spending found both primes statistically significant and had a positive impact on the willingness of subjects to comply (AbdelNabi et al, 2022). Indeed, the nudging approach has proven to be an efficient method in several policy areas as it is a low-cost intervention method that does not limit the choice of people and succeeds to change the attitudes of people.…”

The Correlation Between Double Taxation Conventions, Tax Compliance, and Tax Evasion. Empirical Evidence From Oecd Countries

“…The problem of tax evasion and fraud was analyzed by Stankevicius and Leonas (2015) and was treated in a hybrid model approach with the outcome that tax evaders must be analyzed also through psychological and social portraits. The usage of empathy and voice in the tax evasion problem was analyzed by AbdelNabi et al (2021) with the assessment that the experimental and behavioral approach of citizens' incentives can be a factor that underlies the fight against tax evasion. The dichotomy between fraud and legal aspects of tax evasion was debated also by Opreț et al (2017) on the necessity of creating a common legal framework, especially at the EU level; the authors suggest that they are several factors that must be considered: accounting information and mechanisms and illicit practices.…”

The Influence of Perceptions of Justice and Trust toward Government on Tax Compliance (Case Study on Msme Taxpayers in Surabaya)

“…The Influence of Perceptions of Justice and Trust toward Government on Tax Compliance (Case Study on Msme Taxpayers in Surabaya) [1] Agus Arianto Toly, S.E., M.S.A., Ak, [2] Angelita Ananda Peery, [3] Anastasya Ellen Wijaya [1] Petra Christian University, [2] Petra Christian University, [3] Petra Christian University [1] agustoly@petra.ac.id, [2] peeryangelita@gmail.com, [3] anastasyameme123@gmail.com significantly contribute to state income. It is because MSMEs are also tax objects, so MSME owners are tax subjects obliged to pay taxes every period.…”

“…Tax justice is implementing the existing tax system, which is running as it should, following applicable regulations, and upholding the principle of equality in providing attitudes toward taxpayers (Soon, 2017). Tax policies or regulations will create the perception that taxes are fair for everyone and are accommodative so that they will encourage taxpayer compliance (Abdelnabi et al, 2022). Therefore, it is very important to carry out measures that can lead to tax compliance to increase public compliance (Cologna et al, 2022).…”

“…Taxpayer compliance can be interpreted as complying with the taxpayers in carrying out their tax obligations following applicable tax regulations or provisions. According to (Abdelnabi et al, 2022), voluntariness in paying taxes is one of the government's goals to increase the economy and state income. So, it can be concluded that tax compliance means taxpayers state that tax compliance is taxpayers voluntarily paying their tax debt to the government to improve the country's welfare by following applicable tax regulations (Timothy & Abbas, 2021).…”