Social economic characteristics and tax compliance
For sustainable economic growth, taxes are essential. For an economy to succeed, tax
administration is essential. Taxes and the tax system are important components of nation
building, which involves enhancing potential for significant economic growth, according to
Moore et al. (2005). In addition to other sources like grants and loans, tax revenues make up the
majority of the government's budgetary resources in Kenya. According to Lymer and Oats
(2010), the tax collection authority must develop the best tools to improve tax procedures and
regulations in order to generate leverage between taxpayers and them. Grants and loans are
frequently used to overcome the revenue-expenditure gap as a result of taxation shortages and
budget shortfalls. Developing nations are most adversely impacted by this problem. Both foreign
and domestic debts make up the loans.
IMF (2018) estimates that a typical lower-income nation collects only 15% of GDP in taxes,
compared to 40% for a typical advanced nation. The ability of a nation to collect taxes is
essential for its ability to finance social services such aiding infrastructure development, security,
health care, and education. Due to the severe needs in low income countries, these nations'
economic progress is at risk due to the low level of tax collection.
According to Rahayu (2010), a number of issues, chief among them a poor degree of taxpayer
compliance, contribute to the low tax collection. According to OECD (2014), tax income
provides economies with the necessary cash for them to invest in development, alleviate poverty,
and provide public services. Fostering domestic resource mobilization entails establishing a tax
structure that favors good governance, inclusivity, enhances government accountability to
citizens, and advances social justice rather than merely raising income.
Over the past ten years, most economies have seen a dramatic improvement in their ability to
collect taxes. On the other hand, less than half of the sub-Saharan African nations tend to earn
tax revenues equal to less than 17% of their respective GDPs, which is below the UN-mandated
minimum need for the achievement of the Sustainable Development Goals. In low-income
nations, the difficulty of boosting domestic revenue has been particularly acute (OECD, 2010).
Uganda's tax collection made up 14% of GDP, which is lower than its regional counterparts and
the government's objective of 16%. Poor tax compliance by Uganda's taxpayers results in low tax
collections (Sebudde et al., 2018). The international development community has assisted
developing nations with domestic resource mobilization and tax reform (OECD, 2014).
In contrast, tax collection authorities in developed economies conduct a variety of assessments
for tax performance, whereby economies can be categorized based on the degree of tax
performance, such as high, low, or average. According to Kloeden (2011), tax revenues tend to
be the major performance indicator in the majority of developing countries. The phrases "tax
performance" and "tax compliance" are used interchangeably since the evaluation of tax
performance frequently depends on the degree of tax compliance. A high compliance rate is ideal
for effective tax revenue collection.
Socioeconomic characteristics
According to Hamm (1995), there is a connection between a taxpayer's knowledge and their
amount of income. Taxpayers tend to be tax compliant when their income grows and their tax
understanding likewise does. According to Chan et al. (2000) and Mamun et al. (2014),
taxpayers with a high level of education are more likely to have morally flawless values and a
thorough understanding of taxes, which increases their likelihood of adhering to the law.
According to Enginda and Baisa (2014), there is no connection between individual taxpayer
education and tax compliance.
Tax knowledge, as defined by Hasseldine et al. (2009), is the degree to which a taxpayer is aware
of tax law and regulations. According to Kasippilai (2000), tax knowledge is essential for
taxpayers to have in order to improve their ability to disclose the precise amount of tax owing or
liability they need to pay to the revenue authorities. Saad et al. (2003) and Loo et al. (2009) both
assert that a taxpayer's compliance behavior is significantly influenced by their level of tax
knowledge. Kirchler et al. (2006) found that taxpayers who are knowledgeable about taxes
typically have greater compliance rates. According to Chattopadhyay and Das-Gupta (2002),
taxpayers who lack tax expertise must seek the advice of tax experts.
According to Nurlis (2015), taxpayers who are well-versed in tax-related issues are more likely
to fulfill their tax obligations since they are aware of the rules and laws they must follow. Sound
tax knowledge improves taxpayer understanding of the significance of paying taxes in addition
to receiving public goods and services as benefits. Tax expertise is essential for reducing the
prevalence of tax fraud and corruption. The general formal education that tax payers acquire
regarding tax laws is essential in regards to filing and registration requirements, according to
Csontos et al. (1998). Additionally, taxpayers typically have little knowledge of actual
government spending and the true cost of the indirect services the government provides to the
general public. According to Lai (2013), a taxpayer must have a thorough understanding of taxes
in order to appropriately determine his or her tax burden.
According to Kirchler et al. (2001), tax compliance and knowledge are positively correlated.
Taxpayers who are knowledgeable about taxes are more likely to comply with the law than those
who are not sufficiently informed. This suggests that taxpayers with solid tax knowledge tend to
view tax avoidance as preferable to tax evasion, but taxpayers with less-than-stellar tax
knowledge tend to view tax avoidance as preferable to tax evasion. Taxpayers should get
pertinent information from revenue authorities on the tax system and the rules they must abide
by in order to pay their taxes.
Depending on how a taxpayer feels about the tax system, tax intricacy affects how they comply
with the law (Alm, 1988; Hite & McGill, 1992). According to Boortz and Linder (2005), in a
situation where taxpayers pay a higher price to understand a complicated tax system, this results
in discrepancy because some taxpayers will pay less tax than others because they take full
advantage of all tax avoidance opportunities, whereas taxpayers who are unfamiliar with the
system will pay more taxes. The intricacy makes it challenging to understand tax law, making it
easier for the taxpayer to understand (Graetz & wilde, 1985; Milliron, 1985; New York State Bar
Association, 1972).
According to Richardson and Sawyer (2001), the increased sophistication of tax legislation is
what causes tax complexity. Complex tax laws tend to make the tax system more difficult to
understand. There are many different types of tax difficulty, such as computational complexity,
form complexity, compliance complexity, procedural complexity, and poor degree of readability
(American Institute of Certified Public Accountants, 1992; Carnes & Cuccia, 1996; Cox & Eger,
2006; Pau et al., 2007; Richardson & Sawyer, 1998; Saw & Sawyer, 2010).
According to the New York State Bar Association (1972), tax complexity has a propensity to
increase taxpayer compliance with the law. Taxpayers frequently think that a complicated tax
structure will lead to economic equity and equality. However, according to Milliron (1985),
taxpayers may evaluate the complexity of tax law from the standpoint of inequity and unfairness.
Taxpayers who believe that tax complexity is unjustified may develop a bad attitude toward the
tax system because they believe it is unfair and may therefore be more likely to be non-
compliant.
Observing Tax Laws
According to James and Alley (2002), tax compliance is the taxpayer's commitment to uphold
the tax law without the aid of an enforcement agency. According to Brown and Mazur (2003), a
variety of forms of compliance, such as payment compliance, filing compliance, and reporting
compliance, can be used to describe tax compliance. According to Cobham (2005), tax
compliance has been a problem for many economies when measured by the real tax to GDP
ratio; nonetheless, steps have been attempted to improve it in various countries because it is
important to economies.
KRA (2018) claims that any evaluation of the authority's performance is dominated by its
revenue performance. KRA (2019) reports that the ratio of tax revenue to GDP peaked in FY
2013/14 at 19.0% before falling by about 16.7% in FY 2018/19. This was caused by: Changes in
the economy's structure introduced in FY 2014/15 that leaned on GDP's non-taxable component,
resulting in a decrease of the tax base, which accounts for 1.24 percentage points of the decline;
Shift in discretionary policy, which resulted in a significant loss of actual revenue collected; In
FY 2017/18
Nurmantu (2012) identifies two types of tax compliance: formal compliance and material
compliance. Formal compliance is adherence to the annual tax return collection deadline.
However, a taxpayer who complies with formal compliance requirements may not always meet
the requirements for material compliance. A taxpayer satisfies all material requirements in the
form of truthful content in line with tax regulations. This is known as material compliance. A
taxpayer who meets both the formal and material compliance requirements does so
simultaneously.
According to KRA (2019), Kenya's tax to GDP ratio decreased by 0.7 percentage points between
FY 2013/14 and FY 2014/15, from 19.0% to 18.3%. Tax to GDP ratio decreased by 0.3
percentage points from 18.3% in FY 2014/15 to 18.0% in the fiscal year 2015/2016. Tax to GDP
ratio decreased from 18.0% in FY 2015/16 to 17.8% in FY 2016/17, then further decreased from
17.8% in FY 2016/17 to 16.9% in FY 2017/18, a decrease of around 0.2 percentage points.
Kenya's tax to GDP ratio fell from 16.9% in FY 2017/18 to 16.7% in FY 2018/19, a 0.2
percentage point drop.
According to World Bank (2017), Kenya's GDP growth rate has averaged 5.6 percent during the
past ten years, above the world average of 2.3 percent. In contrast to Kenya's GDP's resilience,
tax revenue growth has not been linearly correlated with economic growth. Financial challenges
have been brought on as a result of KRA's subpar tax revenue performance. Bypassing revenue
collection levels with expansion expenditures, the economy now has a budgetary deficit. In
comparison to tax collections, which climbed by less than the nominal GDP's 14.9 percent
growth rate in the FY16–17, revenue increased by 13.3 percent. As a result, the tax-to-GDP ratio
decreased to 16.9% of GDP, the lowest level in ten years.
While revenue collection has fallen short of expectations, government spending has been rising.
90.2 percent of the total revenue was consumed by recurring expenses, leaving limited funds for
development costs (National Treasury, 2017). By KES 1.3 billion, the actual income tax received
in FY 2013/14 fell short of the desired income tax. The actual income tax collected in the fiscal
year 2014–2015 fell KES 23.9 billion short of the desired income tax. The actual income tax
received in the FY 2015/16 fell KES 17.2 billion short of the desired income tax. On the other
hand, in the FY 2016–17, real income tax collection was KES 1.18 billion higher than targeted
income tax collection. Actual income tax receipts for the fiscal year 2017–2018 fell short of the
desired level by KES 69.6 billion. The actual income tax received in FY 2018/19 fell KES53.5
billion short of the desired income tax (KRA ,2019). In order to determine how social-economic
factors affect individual taxpayers' tax compliance in Kenya, research on these factors is
essential.
In Africa, country culture and taxation performance were researched by Taiwo et al. in 2020. In
10 African countries, that study evaluated the effects of national culture aspects such
individualism, distance of authority, long-term perception, and contentment on tax collecting
performance. The study found a negative association between power distance, individualism,
long-term performance, and tax revenue performance while finding a favorable relationship
between contentment and tax revenue performance. The current study examined whether tax
fines in Kenya can modify the relationship between social and economic characteristics and
individual taxpayers' tax compliance. The current study looked at how tax knowledge, tax
complexity, and individual taxpayer traits affected Kenyan individual taxpayers' tax compliance.
Saad (2014) looked at the relationships between tax complexity, tax compliance, and tax
knowledge. The study was conducted in Malaysia, and data were gathered using telephone
interviews. It was determined that tax complexity was a contributing cause of taxpayer non-
compliance. According to the report, complex tax systems result in higher compliance costs for
taxpayers. A Tax systems with lengthy processes are thought to be inherently complicated. If
taxpayers believe the tax code is overly complicated, they are more likely to not pay their fair
share of taxes. However, the purpose of the current study was to determine how tax knowledge,
tax complexity, and individual taxpayer characteristics affected Kenyan individual taxpayers' tax
compliance. The current study also aimed to determine if tax fines in Kenya actually affect the
relationship between social economic characteristics and individual taxpayers' tax compliance.
Wadesango and Mwandambira (2018) conducted a study to determine whether tax compliance
by small and medium-sized businesses in Zimbabwe is impacted by tax knowledge. This study
found that while small and medium-sized businesses have a fundamental understanding of taxes,
they frequently lack solid information on more complex tax topics, such as how to distinguish
between presumptive taxation and income-based taxation. It was determined that tax had little
bearing on their propensity for disobedience. The current study, however, evaluated the effect of
tax compliance by individual taxpayers in Kenya, taking into account not only tax knowledge but
also tax complexity and taxpayer-specific factors.
Mukasa (2011) conducted a study on tax compliance, tax knowledge, and tax justice in Uganda.
In that study, it was determined that both tax knowledge and tax compliance were positively
influenced by perceptions of fairness in the tax system. Abstract and concrete knowledge were
the indicators utilized to gauge tax knowledge. The present study, however, was carried out in
Kenya with a focus on KRA taxpayers. The ability to calculate tax liability, the capacity to file
returns on time, and the ability to consult tax specialists are the study's measurement indicators.
The purpose of the study was to determine whether tax knowledge in Kenya affects individual
taxpayers' tax compliance.
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