The effect of good governance on the voluntary payment of taxes

Academic Paper, 2018

6 Pages, Grade: 3.5



In Nigeria, the need to improve voluntary payment of taxes or voluntary tax compliance has resulted in the various tax reforms attempts by various successive governments. Suffice to mention that these reforms have not been able to stimulate the expected increase in tax revenue over the years, and this has snowballed into an unarguable tax gap as revealed in the share of income taxes in total revenue profile of the country. The evidence from statistical records shows that the proportion of income taxes to the government’s total revenue has been abysmal.[1] This poor tax compliance behavior often referred to in the literature as the “compliance puzzle” is a challenging experience across countries but suspected to be more critical in developing economies. In retrospect, the prevailing orthodoxy in modeling tax compliance behavior has been in line with the economics-of-crime approach based on the expected utility maximization calculus model by Allingham and Sandmo.[2] The model presents and specifies the extent of compliance as positively correlated with the probability of detection and the degree of punishment and identified tax rate, penalty and detection probability as factors influencing taxpayers’ behaviour. In modeling tax compliance, the answer under the traditional theory of compliance implied by the Allingham and Sandmo’s model is fear of detection and punishment. However, this model has been found to be inadequate in explaining the motives and intentions for tax compliance.[3] The argument is that tax compliance may be subdivided into compliance resulting from enforcements or influence of tax authorities and voluntary compliance. While the Allingham and Sandmo model provides justification for the proportion of total compliance signaled by enforcements which may be specified as a function of penalty and detection probability, it does not provide explanations for what may inspire voluntary compliance, that is, complying with the tax laws without being compelled by the tax authority to do so.

This leads to a logical question which interestingly extends the compliance issue; what would lead citizens to behave more honestly, provide correct information and improve the tax compliance rate voluntarily? One answer to this question is the existence of an intrinsic motivation to pay taxes, which have been sometimes called, “tax morale”.[4] Tax morale has evolved as an instrumental component in understanding voluntary tax compliance using a more integrated approach with a bias for non-economic factors. This study argues that the citizens’ perception of government accountability is an instrumental factor that shapes the emergence and maintenance of tax morale resulting in voluntary tax compliance. The underlining framework according to Sacks and Levi is that there is a social contract that defines the relationship between the government and the governed.[5]

Levi argues that if it is perceived by the taxpayers that the rate of transformation from tax to public goods is low then the taxpayers will feel that the government has not kept its obligation of the contract, as a result, the tax morale will be affected negatively which would result in deteriorating voluntary compliance. Thus voluntary compliance, particularly in contemporary states, may be seen as a function of the citizens’ assessment that government upholds the fiscal contract with its citizens and meets prevailing standards of procedural fairness in delivering public services.

In Nigeria, there are indications that the institution of governance at all levels is entangled in a web of public distrust and declining public confidence.[6] Elaigwu notes that there is a big gap between the rhetoric of transparency and accountability on the one hand and demonstrable commitment to values in the actions of the political actors, on the other hand.[7] In another perspective, Onyegbula has pointed out that optimistic expectations from government have all been dashed with the increasing loss of accountability even in the midst of a representative democracy. The trend is worsened by the wide gap between government official pronouncements and actions. In the light of the above, there is a need to investigate the nexus between citizens’ perception of government accountability and voluntary tax compliance.

The need to examine the issue of voluntary tax compliance as a subset of the broader body of knowledge on tax compliance as emerged, motivated by the inadequacies of the prevailing orthodoxies on tax compliance to capture the proportion of total compliance not accounted for by economic models. Allingham and Sandmo in their proposition based on economic perspective of tax compliance which provided a considerable basis for enforcement strategies to ensure compliance had argued that tax rate, penalty and detection probability are the factors influencing taxpayers’ behavior. In modeling tax compliance, the answer under the traditional theory of compliance implied by the Allingham and Sandmo’s model is fear of detection and punishment. However, the model has been criticized and several studies have shown the limitations of enforcement strategies. Specifically, Kornhauser submitted that this deterrence theory, however, accounts for only a minor portion of actual compliance levels.[8] It has such poor explanatory power because it assumes that the decision to comply is based solely on a cost-benefit analysis in which people rationally weigh the benefits of non-compliance against the costs of detection and penalties. In this regards, Frey demonstrates that intrinsic motivation are also relevant for explaining compliance behavior.[9] The opinion of Frey is suggestive as stated previously, that there is unattended proportion of systematic compliance unexplained by enforcement mechanisms and the general deterrence theory and this creates the platform for examining voluntary compliance. In his contribution, Kirchler submitted that compliance might be voluntary or enforced compliance.[10] Voluntary compliance is made possible by the trust and cooperation ensuing between tax authority and taxpayer and it is the willingness of the taxpayer on his own to comply with tax authority’s directives and regulations. Also, Voluntary Tax Compliance is a tax system based on taxpayers complying with the tax laws without being compelled by the tax authority to do so. Under this system taxpayers are expected to report their income, calculate their tax liability and file a tax return.[11] Lubian and Zarri[12] argue that several empirical studies have shown that taxpayers are more honest and may respond voluntarily in the fulfillment of their tax obligation than classic deterrence models inspired by the economics of crime approach would predict. They argued further that citizens may be driven by a positive moral attitude towards taxation thus it may not be appropriate to specify compliance behavior as a purely economic decision under uncertainty or simply a function of enforcements. Researchers have attributed the response of voluntary compliance to a set of intrinsic motivation or attitude often referred to as tax morale.[13]

Tax morale emphasizes that taxpayer’ internal motivations, social norms, personal values, cognitive processes and sense of moral obligation to pay taxes can help to explain the motivation for voluntary tax compliance. Thus positive morale may signal higher voluntary compliance while negative morale will signal lower voluntary compliance. Several studies have identified the factors that may elicit and maintain tax morale and stimulate voluntary tax compliance.

According to Torgler and Schaltegger[14] Socio-demographic factors which are generally agreed to be critical determinants of behavior have also been observed to influence tax morale. Most theories regarding the effects of socio-demographic factors on compliance behavior have been developed by social psychologists. Tittle argues that females may exhibit stronger positive tax morale suggestive of higher voluntary compliance than males.[15] Tittle argues further that the reason could be that females are more risk averse than males. According to Kirchgässner, religiosity, measured as church attendance and the perceived degree of religiosity may also play a role in tax morale and voluntary compliance as those who take their religion to heart may find attempts at noncompliance as been “unrighteous”.[16] The finding of Torgler and Schaltegger also support this view as their results suggested a positive correlation between church attendance/religiosity and tax morale. Blumenthal, Christian and Slemrod reporting findings from a field experiment, identified the impact of moral persuasion on voluntary income tax compliance. Levi argued that if it is perceived by the taxpayers that the rate of transformation from tax to public goods is low then the taxpayers will feel that the government has not kept its obligation of the contract, as a result, the tax morale will be affected negatively which would result in deteriorating voluntary compliance. The OECD[17] equally submitted that delivery of quality of service to taxpayers will strengthen their willingness to comply with tax rules and regulation voluntarily as result will contribute to overall level of tax compliance. Cowell argued that the individual’s perception of personalized inequity or equity can be rationalized and reflected in their tax morale and compliance behavior.[18]

That taxation is bedrock for states to fulfill their responsibility and ensure their continuity is an unarguable axiom. As Rakner and Gloppen[19] notes for most countries taxation goes hand-in hand with economic growth and taxes have become the lifeblood for governments to deliver essential services and to make long-term investments in public goods. The nexus between government accountability and voluntary tax compliance has emerged as a non-economic approach to modeling voluntary compliance based on the recognition that there exist a relational social contract between the state and the citizens. According to Baskaran and Bigsten, the state's fiscal capacity is influenced by the strength of this social contract. The social contract is bounded and strengthened by accountability relations between parties involved. Moore and Rakner notes that generally, accountability relations involves at least two parties; the one who has been entrusted with something that gives rise to the accountability obligation, and the principal who gave the mandate in the first place, or an agent delegated this authority.[20] Democratic accountability is a special case where the principal is “the people” and the parties owing accountability are those entrusted with political power. Within the context of this social contract, voluntary tax compliance has been specified as a plausible outcome dependent on the perception of the principal that the terms of the social contract are been met. According to Rotberg and Gisselguist[21] it seems there is correlation between perception of governance accountability score and income tax revenue performance, for instance Nigeria had 2.5% as income tax ratio and good governance score of 49.6 %; South Africa was having 14.4 and 69.4% while Uganda had 3.8 and 57.9% respectively in 2006. Individuals in a given state accept and trust their government in general and voluntarily complies with the tax burden in particular, if the government and/or the state provide them with conditions that enhance and protect their human dignity, trigger their morality and respect for moral norms. Tansey argues that for the citizens to have a sense of obligation to the state there must be a rational relationship between the citizens and the state.[22] Tyler (1998) in his opinion submitted that this obligation is a basic requirement of the relationship between the citizens and the state suggesting that citizens are not an unwilling element, but a conscious and voluntary partner in such a relationship. Thus, for citizens to demonstrate support for the government, the state must have been seen to play its part.

In this regards, Azeez notes that political obligation therefore is a function of the extent to which the state can better the lots of her citizens.[23] If governments are perceived as accountable, more people will pay their taxes “voluntarily”, which lowers the need for coercion and generally reduces the costs of tax-collection. Conversely, if people do not see their governments as accountable, there is an increased likelihood that state demands for (new or higher) taxes will be met with protest and violence that is costly and might even jeopardize the position of those in power.

According to Everest-Phillip and Sandall the public perception of government accountability can influence of tax morale and tacitly, voluntary compliance. Both authors argued that through payment of taxes the government is able to meet its obligations to the people. It follows therefore that how government goes about in fulfilling these obligations should matter to the taxpayers because they provide the finance for its sustenance. As a result, governance affairs may have either positive or negative influence on the tax morale of taxpayers. The tax function creates a relational vertical contract between government and taxpayers which Lassen[24] defined the expectation of requisite public goods in exchange for taxes paid as the terms of that vertical contract. According to the argument of quid pro quo, complying with tax law provision depends in part, on whether the political goods provided by the government are sufficient in return to the taxes they are paying. Levi argues that if it is perceived by the taxpayers that the rate of transformation from tax to public goods is low then the taxpayers will feel that the government has not kept its obligation of the contract, as a result, the tax morale will be affected negatively which would result in deteriorating voluntary compliance. Taxpayers are sensitive regarding the way the government uses the taxes and as such the tax morale may be represented as a reflection of an input-output relation between what an individual pays with his/her taxes and what comes back from the government. Thus, individuals’ tax morale might be influenced by rationalizing the benefits received from the government in form of public goods with taxes paid. Individuals might feel cheated if taxes are not spent adequately which may result in tax morale been crowded out. Akpo equally stated that good governance entails the provision of quality public goods to the public and that where government fails to provide public amenities and infrastructure to the citizen in exchange for tax payment, citizen may become reluctant to pay tax.[25] The study of Alm and Gomez established significant positive association between perception of the benefits to be derived from political goods and the willingness of taxpayers to comply with tax laws. Natufe argued that Nigeria is experiencing a fundamental crisis in public governance.[26] In a similar vein, Abati notes that the state of decay in Nigeria’s public infrastructure and economic activity are reflection of poor public governance quality and the low tax morale and voluntary compliance may have become the aftermath effect. Moore in explaining the weakness of tax-accountability relations in African countries, argued that aid and aid dependency has thwarted the development of a reciprocity based fiscal contract and the general governance accountability system. According to this perspective, the more states depend on unearned income the less accountable they will be towards their citizens and the more a state earns its income through the operation of a bureaucratic apparatus for tax collection, the more the state needs to enter into reciprocal arrangements with citizens about provisions of services and representation in exchange for tax contributions.[27]

In conclusion Voluntary tax compliance or payment of taxes is not influenced by the individual’s perception of Government accountability and also Voluntary tax compliance is influenced by the individual’s perception of Government accountability.


[1] Asada, D.” The administration of personal income tax in Nigeria: Some problem areas. Working paper, University of Jos, Nigeria.

[2] Allingham, M., & Sandmo, A. Income tax evasion: A theoretical analysis. Journal of Public Economics, 1 (3-4),323-338.

[3] Graetz, M.J. and L.L. Wilde. The economics of tax compliance: Facts and fantasy National Tax Journal 38: 355-363.

[4] Feld, L. P. and Frey, B. S. Deterrence and tax morale: How tax administration and taxpayers interact. OECD Papers, 3 (10),1-19.

[5] Levi. F. Tax evasion and tax compliance. In B. Bouckaert, & G. DeGeest, Encyclopedia of Law and Economic. Cheltenham: Edward Elgar.

[6] Natufe, O. I. Governance and politics in Nigeria. Staff and Graduate Seminar. Benin city: University of Benin. Abati, R. Nigeria's deplorable roads. The Guardian, p. 2.

[7] Elaigwu, J.I. "Democracy, Transparency and Accountability in Nigeria,"Newswatch Annual Lecture. February 18.

[8] Kornhauser .M.E Normative and Cognitive Aspects of Tax Compliance: Literature Review and Recommendations for the IRS Regarding Individual Taxpayers. Taxpayer Advocate Service — 2007 Annual Report to Congress — Volume Two

[9] Frey, Bruno S. “A Constitution for Knaves Crowds out Civic Virtues,” Economic Journal 107: 1043–53.

[10] Kirchler, E., Why pay taxes? A review of tax compliance decisions. Working paper 07-03, Altanta: Georgia State University.

[11] Quadri, R.K. Improving voluntary tax compliance within the informal sector in Lagos state. A paper delivered at the 4th Lagos state taxation stakeholder’s conference, Victoria Island, Lagos.

[12] Lubian,.D and L Zarri. Happiness and Tax Morale: an Empirical Analysis. Working Paper Series Department of Economics University of Verona

[13] Frey B & Togler B. Rewarding Honest Taxpayers ? Evidence on the Impacts of Rewards From Field Experiments. Paper presented on April 9-11 2006 on “Managing and Maintaining Compliance “.

[14] Torgler, B., & Schaltegger, M. Causes and consequences of tax morale: An empirical investigation. Working paper No 2007-11, CREMA.

[15] Tittle. C. Sanctions and Social Deviance: The Question of Deterrence, New York: Praeger.

[16] Kirchgässner, G. Homo Oeconomicus, second edition. Tübingen: Mohr Siebeck.

[17] Organisation for Economic Co-operation and Development. (2008). Improving taxpayer service delivery:Channel strategy development . Forum on Tax Administration Taxpayer Services Sub-group. Retrieved July 14, 2011 from www.oecd,org/dataoecd/56/47/3528306.

[18] Cowell, F.A. Cheating the Government: The Economics of Evasion. MIT Press, Cambridge.

[19] Rakner, L., and Gloppen S. Tax reform and democratic accountability in sub-Saharan Africa. Retrieved from on 23rd may 2012.

[20] Moore, M and Rakner, L. (eds.): ‘Introduction: The New Politics of Taxation and Accountability in Developing Countries’, IDS Bulletin 33 (3) (July).

[21] Rotberg, R. I., & Gisselguist, R. M. Strengthening African governance: Index of African governance results and rankings. Cambridge: World Peace Foundation.

[22] Tansey, S D. Politics: The Basics. TJ Press (Padstow) Ltd., Padstow, Cornwall, U.K., pp. 107- 128.

[23] Azeez, A; Contesting “Good Governance” in Nigeria: Legitimacy and Accountability Perspectives Journal of Social Science, 21(3): 217-224.

[24] Lassen, D. D. Ethnic division and the size of the informal sector. Working paper, Institute of Economics ,University of Copenhagen.

[25] Akpo, U The people as government: imperatives of tax payment. Being a paper presented at the 1st Akwa Ibom state revenue summit.

[26] Natufe, O. I. (2006). Governance and politics in Nigeria. Staff and Graduate Seminar. Benin city: University of Benin.

[27] OECD ibid.

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The effect of good governance on the voluntary payment of taxes
University of Nigeria
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Agu Okezie David (Author), 2018, The effect of good governance on the voluntary payment of taxes, Munich, GRIN Verlag,


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