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This research aims to find and explain factors determine tax compliance. In this chapter, there will be discussed several theories and previous research related to the tax compliance, factors influence tax compliance, and the the relation of those factors with tax compliance. Moreover, in the relation of those factors with tax compliance, this research focus on three factors which are first, institutional factor which is explained by workload factor. Second is demographic factor which is explained by gender factor. Third is organization inertia which is explained as the stability or consistency of organization performance.
II.1. Tax Compliance
Before moving to those factors, the definition of tax compliance should be defined first. There are many exact explanations regarding to the meaning of tax compliance. In table 2-1, summarizing those definitions from several theories.
Table 2-1 Definition of Tax Compliance
Andreoni, Errard, and Feinstein (1998)
Willingness to obey tax laws.
"compliance with reporting requirements, meaning that the taxpayer files all required tax returns at the proper time and that the returns accurately report tax liability in accordance with the internal revenue code, regulations and court decisions applicable at the time the return is filed" (223).
Sapiei and Kasipillai (2013)
"The accurate reporting of income and claiming of expenses in accordance with the stipulated tax laws" (82).
Palil and Mustapha (2011)
"Taxpayers' willingness to comply with tax laws, declare the correct income, claim the correct deductions, relief and rebates and pay all taxes on time" (9).
From those definitions, in short, the meaning of tax compliance is the willingness of taxpayers to obey the regulation (reporting and paying taxes) voluntarily. Therefore, this voluntary compliance can be analized into two perspective which is comply in terms of material compliance which is declaring all incomes and claiming the expenses correctly base on the regulation (Devos, 2005; Sapiei and Kasipillai, 2013; Palil and Mustapha, 2011) and in terms of formal compliance which is paying and reporting taxes on time (Palil and Mustapha, 2011). Report correctly means income should not under-reported and expense should not over-reported.
Palil and Mustapha (2011) have studied the factors determine tax compliance. They discussed the factors and devided into four groups consist of ten factors. First is the economic factors including tax rates, tax audits, and perception of government spending. In tax rates, they found that when tax rates increase, people tend to evade tax. Furthermore, it depends on the level of trust. When level is high, paying taxes has the meaning for sharing our income to the community (Misu, 2011). However, when the level is low, it means that there is unsimilar treatment from the government to taxpayers (Palil and Mustapha, 2011). Tax audit also might influence tax compliance. The relation of tax audit and tax compliance is depend on the tax system. In self assessment system  , tax audit enhance the level of tax compliance (Palil and Mustapha). They stated that auditing may change their attitudes and behavior toward tax report and encourage taxpayers to report tax returns correctly . In other words, when taxpayers are audited, they are likely to be more comply with taxes. Perception of taxpayers on government spending is also the key factor in influencing tax compliance (Palil and Mustapha). They found that when taxpayers discover that the amount of money from their taxes are spent unappropriately, taxpayers tend to evade taxes.
Second is institutional factors including the role of tax authority, procedure of tax returns and administration, and the probability of being detected (Palil and Mustapha, 2011). Those three factors are related to efficiency of tax authority. Since taxpayers have different knowledge and education, when tax authority manage taxation efficiently, it also means that the tax returns procedure and administration is simple enough to help taxpayers to report tax returns (Palil and Mustapha). Furthermore, they also stated that the efficient tax system also can detect and supervise taxpayers sufficiently. Thus, regarding the function of tax authority is to increase tax compliance, when they manage efficiently, the level of compliance is likely to increase (Palil and Mustapha).
Third is social factors including ethics, perception of fairness, and political and government policies (Palil and Mustapha, 2011). Tax ethics is based on the attitudes and behavior toward taxation which rely on moral (Palil and Mustapha). They stated that people pay taxes because of the commitment and obligation to obey the regulation. This moral is indicated on their attitudes and behavior by paying taxes and submitting tax report. Fairness is a basic concept in taxation. It means for those who have higher income should pay higher taxes than those who have less income (Palil and Mustapha). Thus, when people discover that they are treated unfairness, in other words they pay taxes higher than others in the same level on income, the level of compliance decrease. Indeed, they tend to report their income lower than it should be. Individual decision toward tax compliance is also influenced by political and government policies. It is found that people with the same political views with government tend to comply with taxes (Palil and Mustapha). They investigated that this attitudes is basically influenced by degree of trust to the government. Since the people have the same political view with the government, they believe that government policy is effective and efficient.
The last is individual factors consist of financial constraints and the awareness of penalties and offences (Palil and Mustapha, 2011). In their live, people are more likely to prioritize on the basic need first such as clothes, houses, and foods, followed by other less important needs. For those who have unlimited financial condition it is easier to fulfill their needs. However, for individual with limited financial condition, having basic need is such big problem. Therefore, they are more likely to ignore other additional needs. Unfortunately, paying taxes is one of the additional cost to be ignored. Thus, people with limited financial condition have a tendency to evade taxes (Palil and Mustapha). The last factor explained in research by Palil and Mustapha is the awareness of penalties and offences. They stated that when taxpayers concern of the consequences for their illegal action (sanctions) to evade taxes, they might enhance their tax compliance. Conversely, if they do not aware for the consequences, they tend to increase tax evasion.
Another research is conducted by Kasipillai and Jabbar (2006). They explained the influence of gender and ethnicity on tax compliance. Base on gender and ethnicity, they aimed to investigate the people's behavior and attituted toward tax compliance. They stated that there are the differences between male and female in attitude and behavior toward compliance. For male, the basic reason that they are likely to obey the regulation is the sanctions and penalties. On the other hand, female aim to comply with taxes because of their feeling. They might feel guilty and unrighteous if they do not comply. The conscience is a major role underlying the female action (Kasipillai and Jabbar). Attitudes and behavior is also influenced by ethnicity. If discussing about ethnicity, the differences in culture should be taken into account (Kasipillai and Jabbar). With different culture, each ethnic should have different behavior and attitude. Since the attitude and behavior underly their decision and action toward taxation, they also differ in the level of tax compliance.
Misu (2011) stated that there are two big factors which are economic factor and non-economic factor might influence tax compliance. Economic factor consist of the level of actual income, tax rate, tax benefit, tax audit, audit probabilities, fines and penalties. The level of income, as stated by Misu, might have correlation with the effort. It is explained that income obtained by hard work is hardly to spend even for paying taxes. Thus, people having this type of income are likely to evade taxes. Similar with Palil and Mustapha (2011) research explained above, Misu also pointed out that when tax rate increase tax compliance is decrease. Tax rate is correlated with the level of people's trust to the government. The correlation of trust and tax compliance is positive. Tax benefit is also considered as a factors affecting tax compliance (Misu). It is discussed that people have a tendency to choose the form of business which give the higher benefit to them. The benefit is the lowest amount of taxes they should pay. Therefore, the migration between among business entites is high when the amount of taxes gap is high across those entities. Tax audit and audit probability can be analized from two different perspective which are the quantity of taxpayers being auditted and the quality of taxpayers being audited (Misu). Both perspective are considered affecting tax compliance. When taxpayers are audited, they might perceive that they are supervised by tax authorities. Furthermore, when the probability being audited is high the evasion toward taxes is reduce. Therefore, they have a tendency to report their tax return correctly (Misu, 2011; Palil and Mustapha, 2011). The rates and type of penalties and fines is different in relation with the action of tax evasion and avoidance (Misu). It is also stated that the differences is also base on the types of taxpayers. If taxpayers evade to paying taxes intentionally, the penalty usually higher compare with unintentionally tax evasion (Misu). When the penalty and fines are same across different taxpayers and different level of deliberation, people might perceive that they are treated unfair. Thus, it is likely to increase tax evasion among honest taxpayers.
In non-economic factors, there are attitude toward taxes and personal, social, and national norms. Attitude toward taxes can be positive or negative (Misu, 2011). If positive, it means the perceiving toward taxation is positive. Moreover, taxes is considered as a sharing among community (Misu). However, when taxes is considered negatively as a constraint, cost, and burden, it influences people to evade taxes. Norms and ethic is closely related. In the research by Kasipillai and Jabbar (2006), they used ethic as a framer of behaviour. In Misu (2011) research, it is explained that norms can also determine behaviour. For example, if tax evasion is acceptable in one group an become a common norms in the group, those action might be spread to others within the group or to other groups.
In Directorate General of Taxes (DGT), Key Performance Indicator (KPI) is a measurement for organization performance. Based on the regulation number SE-18/PJ.1/2006 concerning KPI , the valuation of DGT performance is measured by KPI. One of the component in KPI is the ratio of annually income tax report submitted by taxpayers (tax compliance). Therefore, in other words performance of DGT can be measured by rate of tax compliance.
From several theories above, they have investigated several factors determining tax compliance. However, the data used in those research is not Indonesia's data. For instance, in the data set used by Kasipillai and Jabbar (2006), they used Malaysia's data to explain the relation between gender and tax compliance. Moreover, there are no similar research using workload (measured by ratio of number of employment over number of taxpayers) in order to explain the relation between workload and tax compliance. Therefore, this research aims to investigate the relation between workload, gender, and organization inertia in case of Indonesia especially in DKI Jakarta province. Several theories to support the hypothesis will be explained in the next subchapter.
II.2. Institutional Factor
Palil and Mustapha (2011) stated that the role of tax authority and probability of being detected are part of institutional factors. Since tax officers detect and supervise taxpayers, probability of being detected and supervised can be lingked to the ratio of number of tax officers devided by number of taxpayers (workload). This ratio means that how many taxpayers supervised by each tax officer. The high number of taxofficers, the higher the probability being supervised. The probability of being supervised and audited has an important role in increasing the accuracy of tax report (Palil and Mustapha, 2011; Misu, 2011). Taxpayers are likely to declare all of their income if their expectation of being supervised and auditted is high.
In research by Palil and Mustapha (2011), it is found that different levels of probability of detection and supervision provide different degrees of compliance and positively affect tax compliance. From their model, the probability of being supervised is the second most significant factor along with tax knowledge as the most significance factors. In short, the probability of being supervised or can be stated as workload affect tax compliance.
Shah et al. (2011) explained that workload can influence performance in which workload results in stress among employees. When they fell stress, the outcome from employees is below expectation. Since outcome is a measurement of performance which is explained by Robbins (1999) "performance is defined as the output and accomplishments of a worker, which are acknowledged by organization or system in which he works in "( cited in Shah et al., 259), the performance also is below expectation. Yang (2004) also argued that there are empirical evidence that workload influence performance and the hypotheses is workload has a significant effect on performance (cited in Shah et al.). Therefore Shah et al. concluded that workload can influence the performance of employees.
According to Shah et al. (2011), the relation of performance and workload curve is more likely an inverted U curve, which is gradually higher and at a certain point it becomes downward. It means that if workload influence performance, as the workload increase the performance also increase. Until reach certain point of workload, the performance gradually decrease.
The finding of Shah's et al. (2011) research was that low performance is highly influenced by high and low workload. Therefore, the organization's leader have to create and evaluate the organization performance system periodically which can enhance the performance of each individual in order to reach the best organization performance. They also found that the organization performance system must be developed to ensure the allocation of task distributed fairly among employees and not exceed from the certain point.
Another research by Cox-Fuenzalida and Angie (2005) which aimed to explain the importance of workload history on performance. It is stated that performance is influenced by employees' ability. If the ability of employees is high, his or her performance is also high. They explained using example of Air Traffic Control (ATC)and driver. When ATC are able to manage the air traffic in the airport, their performance is high. When a driver can perform well, it is because his or her ability to drive is high.
Hypothesis 1 : higher workload might decrease tax compliance.
II.3. Demographic Factor
A research conducted by Kasipillai and Jabbar (2006) explained the relation between gender as a form of demographic factor and tax compliance. They pointed out whether any differences in behavior and attitude in each gender toward tax non-compliance, previous reported tax evasion, and non-compliant behavior. They argued that gender can influence tax compliance in which woman feel guilty when evading taxes while man more focus on the penalties and sanctions. Here, conscience is the motivation behind female attitudes and behavior. Furthermore, conscience motivate people to do the right thing.The result from their research are woman are likely to comply with taxes than a man.
Another paper by Smith and Kinsey (1987) investigated the behavior among individuals in taxpaying compliance. They argued that individuals have different actions. Moreover, understanding the factors affecting behavior and decision they make is necessary. One way in understanding those factors is understanding from psychological point of view (Smith and Kinsey). They stated that psychology of each individual shapes the thougt in intention, attitude, and values toward taxpaying behavior. Marti, Wanjobin and Magutu (2010) also argued that in compliance theory, the psychological factor is important in building attitude toward tax compliance. They stated when considering psychological in each individual, gender is considered as one of the factor affecting the differences in psychological. Therefore, different gender have different behavior toward compliance. From their research, it was found that there are high correlation between tax compliance and taxpayers' attitude. In other words, tax compliance is encouraged by taxpayers' attitude.
Another research by Batrances et al. (2012) stated that message and gender are correlated. They mentioned that if the message is positive and persuasive, woman are more comply with taxes, in contrast, tax compliance among man is high if the message is framed negatively. What Batrancea et al. found in their research is that woman pays taxes because woman are risk aversion and she do not want to pay the tax penalty. Because woman is risk aversion, it makes woman is more comply with taxes than man. Therefore, Batrancea et al. concluded that gender is a factor affecting tax compliance.
Torgler and Valev (2010) discussed that the differences in gender influence behavior and atttitudes. They pointed out that gender is basically formed by such biological, psychological, and emotional factors. Those factors frame the behavior of each gender. For instance, there are less women to commit in crime compare than men. It is because woman is more sensitive than man. Therefore, psychological factor play the role in this example.
Hypothesis 2 : woman are more comply with tax than a man.
II.4. Organization Inertia
Organization inertia is the stability and consistency of the performance of organization over years.
Performance is "related to the conduction of deliberate and intentional actions, whether by individuals or organizations" (Pires, 2010, 9). When performance is emphasized in process and results, resulting in sustainability performance. It means that process and results are evaluated periodically through evaluation mechanism.
One of the characteristic of bureaucracy is to pursue the consistency and relative stability (Weber, 1946). Bureaucrats' actions are limited because their actions are imposed by such regulations. In other articles by Meier and O' Toole (2009) stated that in public organization, it conduct the same procedure and process to produce the same result from year to year. Consistency and stability here is not only over years but also among organizations which produce the same output. Indeed, when the several organizations produce the same output, it has to be proceeded with the same procedure within the bracket of regulation. For instance, when a citizen get a service from public organization, the treatment has to be the same among units and time. Otherwise, he may complaint if he gets different and inconsistency treatment. For example, in the research by Alm, Jackson, and McKee (1992) using IRS data, most of taxpayers in USA complaint about IRS inconsistency (cited in Hutagaol, Winarno, and Pradipta, 2007).
Another research by Vazquez-Casielles, Rio-Lanza, and Diaz-Martin (2007) argued that a good public organization having a stability in performance. By having a standarization to produce the same output and input results sustainability bureaucracy performance (Pires, 2010).
Ryu, Wenger, and Wilkins (2012) also examined and found that previous bad bureaucratic performance affect significantly present performance.. They used the data set in USA from several years to predict the performance in the future by using data in the preceding years. In detail, they used the previous error made by agency to predict the error in the following years. The results showed that the error made by agency (bad performance) is likely to continue in the following years. In contrast, well performance offices are less likely to continue. It means stability and consistency are more likely to happen in bad performance organization. Therefore, they conclude that.bad performance organization mainly come from bad previous performance.
In other words, the consistency in public organization performance is important. Therefore, if performance is consistent, then by analyzing the previous public organization performance, one can predic the performance upcoming years.
Hypothesis 3 : previous tax compliance influence present tax compliance.
From those theories above, institutional, demographic, and organization inertia, it can be concluded that all factors may determine tax compliance and may be able to be applied in Indonesia case. However the relation might be tested first using Indonesia data especially DKI Jakarta province data. Thus in the next chapter, it will be presented and discussed the data, model, and the result.