CHAPTER ONE INTRODUCTION
Background of the Study
Achieving sustainable economic development is the goal of most governments across the world. Governments require sufficient funding either from international donors who attach unfavourable conditions to the funds or they need to generate the funds locally, to provide public goods and services. The former has been the norm for most developing countries, which immensely accounts for their “aid dependency trap”. With the option to generate revenue locally, most governments have placed much efforts into domestic revenue mobilization. Taxation is an important means by which governments generate revenue to finance the provision of public goods and services. Taxation enhances the distribution of income, economic growth and stability, good governance and infrastructural development. Taxation further ensures good governance because the government would have to account for the use of tax revenue.
In recent times, there has been an improvement in domestic revenues mobilized in most African countries. On account of that, the tax revenue to Gross Domestic Product (GDP) ratios have increased substantively; nonetheless, most African countries still record low tax-to-GDP ratio. From Figure 1.1 below, 16 African countries: Cape Verde, Cameroon, Côte d’Ivoire, the Democratic Republic of Congo, Ghana, Kenya, Mauritius, Morocco, Niger, Rwanda, Senegal, South Africa, Swaziland, Togo, Tunisia, and Uganda, were used to obtain the average tax-to- GDP ratio for Africa. This average was compared to that of Latin American and Caribbean
countries, as well as the OECD countries. In 2015, most African states recorded about 19.1 percent tax-to-GDP ratio. Although there has been an improvement in African countries tax- GDP ratio in 2015 than in 2000, it is lower as compared to the Latin American and the Caribbean countries with an average of 22.8 percent, as well as the OECD countries which recorded an average of 33.4 percent. Also, in spite of the 19. 1 percent tax-to GDP ratio for Africa in 2015, it is still lower than the 25 percent threshold for Sub-Saharan African (AfDB, 2018).
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Figure1.1: Tax-to-GDP ratio in 2015
Source: Revenue Statistics in Africa (2017).
Therefore, domestic revenue generation is one the concern of most African countries whose governments are committed to attaining the Sustainable Development Goals (SDGs), specifically, Target 1 of goal 17:
“Strengthen domestic revenue mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection.”
(GSS, 2017 pg.24)
However, due to tax non-compliance, not all African countries are able to mobilize adequate revenue. African countries lose about US$50 billion to illegitimate financial flows such as tax evasion and tax avoidance (UNECA, 2015). Lapses in the tax structure, for instance, the inability of the tax administration to strictly enforce penalties promote tax non-compliance. Consequently, tax non-compliance causes a huge loss of government revenue, and this negatively affects government performance.
Tax non-compliance encompasses the actions of taxpayers that are conflicting with the requirements of the tax legislation. For instance, the basic tax requirements in Ghana are registering with Ghana Revenue Authority (GRA), filing tax returns by the due date, as well as accurately and fully disclosing financial reports (GRA, 2018). Failure to meet any of these basic obligations results in non-compliance.
Tax compliance, thus, refers to the payment of taxes by taxpayers. Two broad views have been empirically established as factors that influence tax compliance. One of the views is that economic factors such as fine rate or penalties, tax rate, and the probability of audit of returns determine tax compliance. The other view suggests that tax compliance is determined by non-
economic factors such as attitude, behaviour, and morals (Bărbuţă-Mişu, 2011). These economic factors, although necessary in determining non-compliance, do not fully explain the reasons for tax non-compliance (Ruiu & Lisi, 2011). Non-economic factors, specifically attitude, norms, perceptions and moral values enhance voluntary tax compliance rather than enforced compliance (Molero & Pujol, 2012).
Apart from these economic and non-economic factors, effective governance also influences people’s decision to be tax-compliant. Issues related to the government affect citizens’ attitude towards the state. Complying with tax laws involves risk since taxpayers hand over their hard- earned money to the government with no guarantee of reciprocity. However, they pay taxes with the hope that the government will provide public goods and services. Taxpayers perceive the government to be trustworthy if they are satisfied with the performance of the government in offering security, public goods and services, as well as reducing corruption in the country. Trust in government is defined in this study as the expectation that the government will act responsibly in using tax revenue. Trust in government is essential in determining the outcome of public policies. Citizens will willingly support government policies by contributing their quota when they have positive expectations of such policies. Higher levels of trust are often related to lower levels of corruption and crime (Chanley, 2002). That is to say, when citizens have trust in the government, they perceive that the level of corruption is low. Trust in government enables the government to remain accountable in providing public goods and services, and enhances economic efficiency in general. In addition, trust in government enhances compliance with rules and regulations, especially the tax legislation of a country.
Studies on tax in Ghana, including Bekoe, Danquah, & Senahey (2016), and Osei & Quartey (2005) have assessed the tax reforms and their effects on revenues mobilized over the years.
In spite of these reforms, MoF (2012) reports that out of the estimated 6 million taxable population, it is only about 1.5 million people (representing 25% of the total taxable population) that pay direct tax. Studies such as Annan, Bekoe, & Nketiah-Amponsah (2013) and Ibrahim, Musah, & Abdul-Hanan (2015) discussed tax issues in Ghana. Annan et al. (2013) used the currency demand approach to estimate tax evasion levels from 1970 to 2010. Their findings indicate that factors such as inflation, per capita income, average tax rate, and age determine tax evasion. Their study, however, does not give attention to the non-economic factors which explain non-compliance. Alternatively, Ibrahim et al. (2015) studied the factors that affect tax moral beyond the economic factors. Their findings indicate that trust in government affects tax compliance. Although Ibrahim et al. (2015) included trust in government in their variables, the measure of trust in government in this study is different. The trust in government variable is constructed based on Rothstein (2005) and Rothstein and Teorell (2008) input-output criterion. This study does not only look at the effect of trust in government on the propensity to pay tax; it also examines the effect of trust in government on tax compliance across localities.
Problem Statement
The problem of tax noncompliance has been a major concern for many developing countries as they aim at attaining the SDG (GSS, 2017 pg.24). Governments of these developing countries have shown this by stating in their budgets and other public financial policy statements that they will put measures in place to mobilize adequate tax revenue (MoF, 2017).
Earlier studies on tax compliance concentrated on the economic factors, for example, tax rate, inflation, audit rate and fines (Annan et al., 2013). The economic approach does not provide an all-encompassing empirical explanation regarding tax compliance decisions. The economic approach of combatting tax non-compliance poorly predicts tax compliance behaviour (Ruiu & Lisi, 2011). It fails to consider the influence of taxpayers’ attitude towards compliance decisions. Thus, tax compliance involves much more than a rational choice of maximizing utility. Taxpayers’ decision to comply with the tax laws or not must be analyzed in the context of human behaviour rather than the standard economic approach (Molero & Pujol, 2012). Hence, non-economic factors such as norms, trust in government, attitude, fairness, and perception can also explain tax compliance as taxpayers are committed to paying tax, and not because they dread the consequences of not complying with their tax obligations.
Most studies (see, for example, Alm & Torgler, 2004; Levi & Stoker, 2000) draw on the World Values Survey (WVS) data in their research on trust in government and the propensity to pay tax. Their findings show that trust in government significantly and positively affects tax payment propensity. However, such studies are contextually different from the current study which is set in a developing country, specifically, Ghana. Developing countries are different from advanced countries with regard to their geographical location, culture and tax administration. They may, therefore, exhibit distinct findings on trust in government and tax compliance.
Studies on trust in government have not been given attention in Ghana except for the work of Ibrahim et al., (2015). Even though Ibrahim et al. (2015) found trust in government to be positive and significant in determining tax morale in Ghana, they did not investigate whether the location of taxpayers influence their trust in government and consequently their compliance
behaviour. Studies on trust in government and tax compliance are limited in Ghana due to the lack of data. Also, in their study on tax administration in Ghana, Armah-Attoh & Awal (2013) assert that individuals residing in the urban areas evade taxes more than those living in rural areas. This is probably because people residing in the urban areas perceive the government to mismanage resources and not provide adequate public goods and services.
The economic factors could not completely explain tax noncompliance since the situation still prevails in Ghana. To improve upon the tax revenue generated in Ghana, it is necessary to examine how trust in government affects tax compliance. It is appropriate for non-economic factors influence on tax noncompliance be investigated more. While previous studies are useful in providing insights on trust in government and trust in government, they do not explain the effect of trust in government on tax compliance across localities. This is because by focusing on the effect of location on tax compliance, the studies do not clearly explain whether tax noncompliance among the urban dwellers is as a result of lack of trust in government. This study addresses these limitations by using the sixth round of the Afrobarometer survey to investigate the effect of trust in government on tax compliance and the effect of trust in government on tax compliance across localities.
