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Issues in Social and Environmental AccountingVol. 5, No. 1/2 December 2011Pp 3-24 Public Governance Quality and Tax Compli-ance Behavior in Nigeria: The Moderating Role of Financial Condition and Risk Preference James O. Alabede1 Department of Accountancy, Federal Polytechnic Bauchi, Nigeria Zaimah Bt. Zainol Ariffin2 Kamil Md Idris3 College of Business Universiti Utara MalaysiaAbstractTo have better understanding of compliance behavior of individual taxpayers in developingcountries especially Nigeria, this study is undertaken primarily to test relationship between tax-payers’ perception about public governance quality and their compliance behavior as well as todetermine whether the relationship is moderated by financial condition and risk preference indi-vidually and jointly. This study involved a survey of individual taxpayers’ opinion, perceptionand behavior about public governance quality as well as tax compliance. The major finding ofthis study is that public governance quality has significant positive relationship with tax com-pliance behavior. The study also indicates that risk preference has strong negative moderatingeffect on the relationship between public governance quality and tax compliance behavior. Ad-ministration of income tax in Nigeria is characterized by low compliance level and therefore,there is no doubt that improvement in public governance quality would contribute significantlyin reawakening the culture of tax compliance among individual taxpayers in Nigeria. Empiri-cally, nothing much is known in tax compliance literature about the influence of public govern-ance quality on tax compliance behavior of individual taxpayers as well as the moderating ef-fect of financial condition and risk preference on tax compliance and its determinants. Thisstudy extended tax compliance model to incorporate public governance quality and moderatingeffects of financial condition and risk preference.Keywords: Tax compliance, Public Governance Quality, Financial Condition, Risk Preference1 James O. Alabede, Bsc, HND, MSc, MBA, FCA, FCTI, ACIB, is a senior lecturer with Department of Accountancy,Federal Polytechnic Bauchi, Nigeria and specialises in taxation. He is currently a doctoral candidate with School ofAccountancy, College of Business, Universiti Utara Malaysia. Contact: Tel +60142449271, email: firstname.lastname@example.org Dr. Zaimah Zainol Ariffin is a senior lecturer with School of Accountancy, College of Business, Universiti UtaraMalaysia. She specialises in taxation. Contact: Tel +60193922383, email: email@example.com Dr. Kamil Md Idris is a professor of accounting and the dean of School of Accountancy, College of Business, Uni-versiti Utara Malaysia. He specialises in taxation and research methodology. Contact: Tel+60194885050, email:firstname.lastname@example.org
4 J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-241. Introduction (Terkper, 2003). These estimates slightly increased between 14% and 27% overFinancial resources with which govern- the estimates of between 30% and 40%ment discharges its numerous responsi- of GDP in 1993, (Feige, 1998 and Plyle,bilities come in form of tax revenue and 1998). Cobham (2005) estimated thatnon- tax revenue. Alabede (2001) and developing countries lose US$ 285 bil-Olaofe (2008) identified tax as the prin- lion per year as tax revenue due to taxcipal source of revenue to government in noncompliance.some countries1. Eshag (1983) howeverargued that the amount of tax revenue However, over the past few decades, agenerated by government for its expen- growing amount of attention has beenditure program depends among other focused on the issue of tax compliancethings, on the willingness of the taxpay- problem in the world especially in theers to comply with tax laws of a country. developed countries. These general con-It is well accepted that some people do cerns have resulted to numerous empiri-not like paying taxes and because of this cal studies into the phenomenon. Mostreason, it is difficult for tax authorities to of the research studies have viewed theimpose and collect taxes anywhere and problem from the theoretical perspectivetime (Alm, Martinez- Vazquez and of economic deterrence models, (Riahi-Schneider, 2003). The failure to oblige Belkaou, 2004). The classical theory ofto tax provisions suggests that a taxpayer tax compliance otherwise known as A-Smay be committing an act of noncompli- models developed by Allingham andance (Kirchler, 2007). Franzoni (2000) Sandmo in 1972 was based on Becker’sstated that tax noncompliance is most (1968) deterrence theory. The theorycommon and critical of all problems of assumes taxpayer maximizes the ex-tax administration. pected utilities of the tax evasion gam- ble, balancing the benefits of successfulTax noncompliance is a universal phe- cheating against the risky prospect ofnomenon present in both developing and detection and punishment, (Sandmo,developed countries (Chau & Leung, 2005). The general conclusion of this2009; Goradichenko, Martinez- theory is that compliance dependsVanzquez & Peter, 2009; McGee, 2006 largely on tax audit and penalty. Theand Tanzi & Shome, 1993). In develop- implication of the theory is that taxpay-ing countries, tax revenue loss as a result ers will pay taxes only because of theof noncompliance is proportionally fear of sanction therefore more taxesgreater than the amount in developed will be paid with increase in fine or auditcountries because the presence of large rate.informal economy that is the hard- to-tax sector, (Terkper, 2003). The avail- But the deterrence approach as the meas-able statistic put the average tax revenue ure to fight noncompliance has beenloss in developing countries to as much contested in economic analysis. Empiri-as between 35% and 55% of the Gross cal evidences are abundant to prove thatDomestic Product (GDP) in 2002, deterrence may not entirely be depended1 upon to understand the phenomenon of Income tax was 60.3% and58.7% of total tax of the tax noncompliance. For instance, Feldcentral government of Malaysia and Indonesia respec-tively in 2004, (Bird & Zolt,2005). and Frey (2003), Slemrod (2009), Tor-
J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24 5gler (2003) and Torgler and Schaffner and natural endowment as well as eco-(2007) have all reported that fines and nomic potentiality, the country has con-tax audit are unable to account for the tinued to record one of the lowest taxactual level of tax compliance in some compliance rates in Africa, (CITN,countries. Deterrence theory is based on 2010). Even with all efforts through theeconomic analysis and ignores com- various tax reforms2 undertaken by Ni-pletely social and psychological perspec- gerian government to increase tax reve-tive of noncompliance. However, Jack- nue over the years, statistical evidencesson and Millron (1986) and Alm (1999) have proved that the contribution of in-stated that tax noncompliance decision come taxes to the government’s totalmay be affected by factors not consid- revenue remained consistently low andered in the basic model and that other is shrinking. However, of all the taxes,factors may well be relevant in explain- personal income tax has remained theing tax noncompliance behavior. As a most disappointing, nonperforming, un-result, some researchers had expanded satisfactory and problematic in Nigerianthe model. But despite the various ex- tax system, (Asabe, 2005; Kiabel &pansions, literature has nothing much to Nwokah, 2009; Nzotta, 2007; Odusola,show on the influence of perception of 2006; Sani, 2005). The statistical datataxpayers about public governance qual- indicated that contributions of non oility as well as moderating effect of per- income tax to total revenue of Govern-sonal financial condition and risk prefer- ment in Nigeria dropped from 19.8% inence on tax compliance behavior. But 1999 to 11.7% in 2008 and the tax ratiothe relevance of these factors in under- in 2009 was 11% the lowest in Weststanding tax compliance behavior par- Africa and below 15% recommended forticularly in developing countries and low income countries, (CBN,2008; Cob-Nigeria especially cannot be underesti- ham,2005; ITN,2010). Specifically, themated (Bird,&Zolt, 2005 ; Everst-Philip contribution of individual income tax& Sandall,2009; Odinkonigbo,2009; remained marginal and comparativelyTorgler, 2007). This study is undertaken low in Nigeria’s tax revenue. At the stateprimarily to test the relationship tax- and local government levels, where thepayer’s perception about public govern- major source of internal revenue is ex-ance quality and his/her tax compliance pected to be individual income tax, itsbehavior and to determine whether the contribution to the total revenue of theserelationship is moderated by taxpayer’s levels dropped from20.18 and7.7% infinancial condition and risk preference. 1999 to 12.4 and 1.6% in 2008 respec-To achieve these objectives, this paper is tively (CBN, 2008) . Although the loworganized into five major parts. and the shrinking tax compliance level in Nigeria might be caused by multitude of factors, but the relevance of public2. Literature Review governance quality cannot be underesti-Tax Compliance Behavior in Nigeria mated,( Akpo,2009; Bird,& Zolt, 2005;Today, in Nigeria as the case with some 2developing countries, administration of Some tax reforms in Nigeria include Structural Adjust- ment Program in 1986,Shehu’s Task Force on Tax ,income tax is characterized by low com- 1978; Dr Sylvester’s Study Group on Tax , 1999; Eco-pliance level. Despite Nigeria’s human nomic Empowering Development Strategies, 2002
6 J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24Everst-Philip & Sandall,2009; Odin- tical contract which he refers to as quidkonigbo,2009; Oluba,2008). pro quo of taxation. Vertical contract is concerned with whether taxpayers get public goods in exchange for taxes paid.Public Governance Quality and Tax According to the argument of quid proCompliance quo, complying with tax law provision depends in part on whether the politicalPublic governance quality is an issue of goods provided by the government aregeneral concern to citizens of nations as sufficient in return to the taxes they areit bothers directly on benefits derivable paying (Lassen,2003). Levi (1988) ar-from governance. World Bank (2006) gued that if it is perceived by the taxpay-views public governance quality as the ers that the rate of transformation fromprocess in which leaders in authority are tax to political goods is low then the tax-selected, monitored and replaced to- payers will feel that the government hasgether with the capacity of the govern- not kept its obligation of the contract, asment of a country to manage the re- a result, voluntary tax compliance willsources of a country effectively and im- deteriorate. In support of Levi (1988),plement sound policies for benefits of Besancon (2003) also stated that there iseveryone as well as the respect of the social contract between governmentcitizens and the government for the insti- (ruler) and taxpayers (ruled) which em-tutions that regulate economic and social bodied effective delivery of politicalinteraction in the country. Rotberg goods.(2005) also described public governanceas the management, supply and delivery In addition, in line with earlier submis-of political goods to the citizens of a sion of Alm, McClelland and Schulzecountry. To Besancon (2003) public (1992), Lassen (2003) said that the po-governance exists to deliver political litical goods mix is also important andgoods to the citizens and further stated declared that if the political goods mixthat quality public governance is as- supplied by the government is very dif-sumed when a country provides high ferent from those the taxpayers prefer ororder of certain political goods. rate of transformation is low due to cor- ruption, taxpayers may feel the attrac-However, what is the connection be- tiveness of the quid pro quo contracttween public governance quality and tax diminished and that could lead to lowercompliance behavior. Citizens support tax compliance. Arguing in the samegovernment in its responsibilities vein, Torgler (2003) said that when pub-through the provision of finance in form lic governance quality is down, individu-of tax payment. What is happening in als’ tax compliance may be crowded outgovernment therefore, should matter to since government fails to honor his hon-the taxpayers because they provide the esty. Examining the relationship be-finance for its sustenance. In analyzing tween public governance quality andthe relationship between taxpayers and compliance further, Everst-Philips andgovernment, Levi (1988) stated the tax Sandall (2009) noted that there is link-compliance is influenced by vertical age between public governance qualitycontract. He said that the contract be- and taxation and that quality governancetween taxpayers and government is ver- deliver good tax system and equally bet-
J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24 7ter tax system make it possible to have In their contribution, Joshua and Jinjarikgood governance. Akpo (2009) equally (2005) theorized that greater polarizationstated that good governance entails the and political instability in a countryprovision of quality public goods to the would reduce the efficiency of tax col-public and that where government fails lection hence lower compliance level.to provide public amenities and infra- Damania, Fredriksson and Mani (2004)structure to the citizen in exchange for reported that in political stable country,tax payment, citizen may become reluc- there is high degree of compliance withtant to pay tax. Alm, et al (1992) also regulation. The same result was obtainedsubmitted that compliance occurs be- in Tedds (2007). Torgler and Schneidercause people appreciate the political (2009) also noted that lack of efficientgoods that their tax payments finance and effective administration of rule ofand that if there is increase in the laws may undermine the willingness ofamount and quality of the political goods the citizens to pay tax. Bergman (2009)going to them from tax payment, their revealed that country which has estab-compliance rates may likely increase. lished rule of laws and that become widely accepted as well as embraced asKaufmann, Kraay & Mastruzzi, (2007) social norm of its people have betterstated that indicators of public govern- compliance than a country without effi-ance quality include government effec- cient rule of laws. Furthermore, Torglertiveness in provision of quality of public (2003) argued that combating corruptiongoods, participation in governance can help control the problem of tax non-through democracy and accountability, compliance. Uslaner’s (2007) study indi-political stability, adherence to rule of cated that less corruption will lead tolaw and control of corruption. Wall- greater tax compliance.shutzky (1985) revealed that substantialnumber of respondents made compliancedecision in relation to the level of public Financial Condition as a Moderatorservice provided by the government. for Public Governance Quality andAlm, et al (1992) also reported that aver- Tax Complianceage compliance is always higher in thepresence of the public goods. The same The inconsistency of findings on theresult was found in Alm and Gomez relationship between tax compliance and(2008). Torgler (2003) also pointed out some of its determinants most especiallythat the more the opportunity of partici- the deterrents factors (Dubin, Graztepation in political decision making by &Wilde,1987; Dubin & Wilde,1988),taxpayers through democratic means, the has encouraged suggestion in the litera-more relationship between government ture that the relationship may be moder-and taxpayers will be based on trust and ated by some variables (Kirchler, Muel-this will have influence on the willing- bacher, Kastlunger &Wahl,2007). Thereness of individual to pay tax. In tax mo- are indications in other behavioral stud-rale study, Alm, and Torgler (2006) ies that financial condition (requirement)showed that US has high tax morale than and family obligations moderate the re-Austria and Switzerland as a result of its lationship individuals’ commitment andstrong direct democratic value. performance (Mathieu & Zajac, 1990; Brett, Cron & Slocum, 1995). Empiri-
8 J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24cally, some behavioral studies have cause the taxpayer distress particularlyshown support for the moderating ef- when payment is to be made includingfects of financial requirement on indi- taxes. Equally, Bloomquist (2003)vidual’s behavior ( Doran, Stone, Brief shows financial strain as one of the& George, 1991; Brett et al sources of taxpayer’s stress. As support,1995).Specifically, the finding of Brett the criminal behavior study of Carrolland his colleague (1995) provides proof (1989) reported that lack of money moti-that when financial condition is moder- vates individual to search for opportu-ating individual commitment and per- nity for engaging in crime.formance, the relationship between com-mitment and performance is high vis-à-vis. This implies that financial burden Risk Preference as a Moderator formight moderates individual commitment Public Governance Quality and Taxto discharge obligations, including tax Compliancepayment. The implication of moderatingeffect of individual financial condition Risk preference is one characteristic ofon tax compliance and its determinants individual that influences his behavior,may be more obvious in the society (Sitkin and Pablo,1992). In a completewhere there is high family responsibility conceptualization of risk preference,and poverty rate as the case in some de- three ranges are possible. These include:veloping countries including Nigeria risk aversion, risk neutrality and risk(Brett et al 1995). Therefore, financial seeking. A number of researchers andcondition of individual may have posi- scholars have suggested that the attitudetive or negative effect on the relationship of taxpayer to risk cannot be underesti-between his/her perception quality of mated in his/her compliance behavior,public governance and compliance be- (Alm & Torgler,2006; Hite &havior. Torgler (2003) argued that the McGill,1992; Torgler, 2003 ). Torglerfinancial situation of the individual may (2007) submitted that individual taxpay- Public Governance Tax Compliance Quality Behavior Financial Condition Risk Preference Figure1. The Research Framework of Tax Compliance Behavior
J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24 9ers’ decision could be affected by their H3: Taxpayer’s risk preference moder-attitude toward risk. Individual risk pref- ates the relationship between his/ hererence is one of the components of sev- perception about quality of public gov-eral theories relating to decision making ernance and tax compliance behavior.including tax compliance theories likeexpected utility theory, prospect theory H4: Financial condition and risk prefer-etc. The theoretical basis for the moder- ence jointly moderate the relationshipating role of risk preference in the rela- between taxpayer’s perception abouttionship between tax compliance and quality of public governance and taxpublic governance quality is found in the compliance behavior.prospect theory. The theory indicatedthat how a situation is framed will deter-mine the outcome of individual risk 3. Research Design and Methodologychoice. According to Kahneman and Samples and Demographic Character-Tversky (1979), individual tends to be istics of Samplesinconsistent in their decision making asa result of changing situation. Therefore, The samples of the study were selectedwhen tax compliance and its determi- in two stages. In the first stage, Abuja3nants are predicted to have strong posi- city was chosen as the geographical oftive relationship it may not be so be- the study using cluster sampling tech-cause of the effect of individual taxpay- nique. While in the second stage, indi-ers’ risk preference which varies accord- vidual taxpayers residing in Abuja4 wereing to situation and individual to individ- selected randomly as respondents of theual. study and a total of 550 questionnairesIn the light of the relevant literature and were administered to these individuals.theoretical support provided in the sec- At the of the field work, total of 332 oftion above, the tax compliance model usable questionnaires were retrievedwhich only incorporate public govern- representing approximately 60% re-ance quality with financial condition and sponse rate or 87% of predeterminedrisk preference as moderators is set out sample size of 382.in figure 1 below. The demographic information on the respondents as presented in table 1 indi-Based on the theoretical framework cates that about 61% of the respondentsabove, we proposed the following hy- were male leaving 39% as female andpotheses for validation: that the age grouping of majority of the respondents falls between 20 and 40H1: Perception of taxpayer about quality years (72.2%). Equally, approximatelyof public governance has positive rela- 80% of the respondents had higher edu-tionship with his/her compliance behav- cation background either as graduates ofior. polytechnic, university or other tertiary institutions. On occupation, the tableH2: Taxpayer’s financial condition mod- reveals that about 58% of the respon-erates the relationship between his/ herperception about quality of public gov- 3 Abuja city is Nigeria capital city and has representa-ernance and tax compliance behavior. tion from every spectrum of Nigeria society. 4 The samples were selected from list of individual taxpayers in Abuja city.
10 J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24 Table 1 Demographic Information of the TaxpayersCategory Frequency Percentage (N=332) (Total=100) Gender Male 204 61.3 Female 128 38.6Age groups 20 – 30 years 75 22.6 31 – 40 years 148 44.641 – 50 years 85 25.6Above 50 years 24 7.2EducationPrimary education 7 2.1Secondary education 58 17.5Higher education 267 80.4OccupationProfessional 141 42.5Non Professional 191 57.5Source of incomePublic sector 171 51.5Private sector 81 24.4Sole proprietor 80 24.1Income LevelLow income 218 65.7Middle income 83 25.0High income 31 9.3Race Hausa 113 34.0Yoruba 72 21.7Igbo 61 18.4Minority 86 25.9ReligionIslam 96 28.9Christian 225 67.8Traditional religion 11 3.3dents were nonprofessional leaving 42% the study but Hausa (34%) and Christianof the respondents as professional The (67.8%) were more prominence in thesource of income for a little more than study.half of the respondents was the publicsector and also the average monthly in- Generally, the composition of the re-come of about 66% of the respondents spondents to greater extent fairly re-was from less than NGN 50,000 to not flected the characteristic of populationmore than NGN 99,999. Table 1 equally distribution of Nigeria (National Bureaureveals that all the ethnic and religious of Statistic, 2009).groups in Nigeria were represented in
J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24 11Operational Definitions and Measure- Risk Preferencements Taxpayer’s risk preference is a moderat-Public Governance Quality ing variable and it is operationally de- fined as risk- laden opportunities whichPublic governance quality is a multi fac- a taxpayer considers are more desirableeted concept which encompasses all as- than other possible available choicespects of exercising authority through (Atkins, Goldfarb, Kerps, Rogers,formal and informal institutions in the Schoolman & vanOpdrop 2005;management of the available resources Guthrine,2003). The study measured theof a state for the benefit of the people general preference of taxpayer in taking(Huther and Shah, 1999). In the context financial risk, social risk, health risk,of this study, public governance quality career risk and safety risk using fiveis defined as provision of political goods items on 5 point agreed/disagree likert-of necessary quality by government to scale as provided in Nicholson, Soane,the taxpayers efficiently (Rotberg, Fenton-O’Creevy & William, (2005)2005). Kaufmann et al (2007) Torgler etal (2007), Torgler and Schneidler (2009)indicated that public governance quality Tax Compliance Behavioris multidimensional construct with fiveindicators. Following after Marc (2001) Also in the context of this study, taxand Afrobarometer (2006), the percep- compliance is operationally consideredtion of taxpayer on public governance as complying with tax laws involvingquality was measured by 17 items which true reporting of the tax base; correctcut across the five dimensions computation of the tax liabilities; timely(democracy & accountability, political filling of tax returns and timely paymentStability, government effectiveness, rule of the amount due as tax (Chatopadhyayof law and control of corruption) using 5 & DasGupta 2002; Franzoni,2000). Anypoint agreed/disagree likert- scale . behavior by the taxpayer contrarily to the above is noncompliance. Tax com- pliance behavior was measured withFinancial Condition four items covering the four components of tax compliance using hypotheticalPersonal financial condition is a moder- scenario case as was done in Bobek,ating variable and it is defined as the (1997), and Chan, Troutman & O’Bryan,extent to which the taxpayer is satisfy (2000). Respondents were asked to indi-with his financial condition and that of cate (1) the Naira amount of income andhis/her household ( Lago-Penas & Lago- deduction they would report on their taxPenas, 2009; Torgler,2003). It was return if they were in similar situation asmeasured categorically using options of in scenario case (2) the date they would“dissatisfy” and “satisfy” as was done in file their income tax returns if they were(Torgler, 2007) and was re-coded into in similar situation as in scenario casedichotomous values of (0) and (1) re- (3) many days after receiving assess-spectively. ment notice would it take them to pay
12 J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24their income tax if they were in similar Public Governance Qualitysituation as in scenario case. The scoresof (1), (2) and (3) was assigned to the The values of Bartllet’s Test of Spheric-options under each items of the scenario ity (.000) and KMO (.879) suggest thatcase and the values are interpreted as the data on Public Governance Qualitysomewhat compliance, moderately com- are suitable for factor analysis. Thepliance and full compliance. analysis carried out using varimax fi- nally yielded four factors and these fac- tors account for about 84% of the vari-4. Results and Discussion ance with the lowest and highest factorFactor Analysis loading as .761 and .923 respectively. Furthermore, the lowest communalityIn order to check the construct validity and anti-image correlation coefficientof the research instrument, the items of are .588 and .641 respectively. All in all,metric latent variables submitted to fac- the result suggests that the criteria aretor-analysis using principal component met therefore construct validity is as-analysis with varimax rotation. sumed for Public Governance Quality latent variable. The four factors ex- Table2 Factor Analysis for Public Governance QualityFactor Code Load Communal Anti-Image Total VarianceFactor1 28.26%Free and fair election in Nigeria PGQ2 .905 .949 .875Fairness in administration of justice PGQ16 .904 .913 .940Trust of the parliament in making good law PGQ1 .900 .934 .889Independence of the judiciary PGQ15 .891 .912 .917Factor2 28.05%Diversion of public funds due to corruption PGQ10 .923 .945 .857Trust of financial honesty of politicians PGQ9 .912 .952 .857Police effectiveness in combating crime PGQ17 .894 .905 .934Access to govt. annual report and account PGQ4 .858 .824 .964Factor3 15.98%Satisfaction with quality of education PGQ8 .864 .754 .640Satisfaction with quality infrastructure PGQ5 .857 .737 .641Satisfaction with quality in health service PGQ7 .761 .588 .759Factor4 11.38%Decline in political authority and stability PGQ12 .875 .772 .708Ethnical and religious conflict and stability PGQ14 .779 .692 .847KMO: .879 Total Variance Explained : 83.67%Bartlett’s Test of Sphericty: Sig 000Note: 1. Load= Factor loading, Communal= Communality, Anti-image=Anti-image correlation 2.Items deleted in course of the analysis include PGQ3, PGQ 6, PGQ11 and PGQ13
J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24 13 Table 3 Factor Analysis for Risk PreferenceFactor Code Load Communal Anti-Image Total VarianceFactor1 72.89%Financial risk taking RP1 .888 . 667 .837Social risk taking RP2 .872 .760 .815Health risk taking RP3 .870 .789 .821Career risk taking RP4 .820 .883 .756Safety risk taking RP5 .817 .886 .672KMO : .846 Total Variance Explained : 72.89%Bartlett’s Test of Sphericity: Sig : 000Note: 1. Load= Factor loading, Communal= Communality, Anti-image=Anti-image correlationtracted from the analysis contained indi- Risk Preferencecators or items to represent each of thefive dimensions of Public Governance The factor analysis on the items of RiskQuality construct and as a result, the Preference yielded one factor and it ac-combination of these factors would give counts for about of 73% of the variancefair representation of Public Governance with eigenvalue of 3.64 (see table 3).Quality construct. However, this study is The five items of the factor loaded atconcerned with Public Governance value above .80 while the lowest valueQuality scale as whole not each dimen- of communality and anti-image correla-sion of the construct. The reliability test tion coefficient are .667 and .672 respec-on the remaining 13 items gave alpha tively. The appropriateness of the dataof .877. on Risk Preference was also assured Table 4 Factor Analysis for Tax Compliance BehaviorFactor Code Load Communal Anti-Image Total VarianceFactor156.36%Income Reporting TCB1 .833 .504 .810Tax Deductions Reporting TCB2 .793 .426 .788Return Filing TCB3 .710 .629 .695Tax Payment TCB4 .653 .694 .681KMO: .726 Total Variance Explained : 56.36%Bartlett’s Test of Sphericty: Sig 000Note: 1. Load= Factor loading, Communal= Communality, Anti-image=Anti-image correlation
14 J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24with the values of Bartllet’s Test of government effectiveness in the provi-Sphericity (.000) and KMO (.846). sion of public goods like education,These results of analysis also met the health etc, the perception of the respon-criteria of factor analysis and therefore dents expressed in items PGQ5, 7&8provide evidence of construct validity on and majority of the respondents stronglyRisk Preference. Furthermore, the reli- disagreed with the statements in theseability test on the 5 items gave cronbach items that is 57%, 59% and 58% of thealpha .917 respondents respectively. This is indica- tion that the respondents were of the views that government’s effectiveness inTax Compliance Behavior delivery of public goods was low. Fur- thermore, the views of the respondentsWith values of Bartllet’s Test of regarding corruption as contained inSphericity (.000) and KMO (.726), the item PGQ9&10 indicated that 68% offactor analysis of the data collected on the respondents did not trust the finan-tax compliance behavior is assumed. cial honesty of Nigerian politiciansThe analysis yielded one factor which it while 70% disagreed that there is no di-accounts for about of 53% of the vari- version of public fund in Nigeria. Theance with eigenvalue of 2.25. Item mean scores of 2.01 and 1.99 respec-TCB4 has lowest factor loading of .653 tively for PGQ9&10 imply that the re-while the value of communality and anti spondents perceived the control of cor--image correlation coefficient are ruption in Nigeria to be low. Table 5above .426 and .681 respectively. These also shows the views of the respondentsresults met the minimum criteria of fac- on political stability in Nigeria in itemstor analysis therefore support construct PGQ12&14. The mean scores of thesevalidity of tax compliance behavior. In items which are below 2 suggesting thataddition, the reliability test on the 4 the respondents viewed political stabilityitems gave cronbach alpha .740 to be low in Nigeria. On the fairness of the rule of law, the views of the respon- dents were expressed in item PGQ15,Descriptive Statistics 16&17 and all these items have meanPerception about Public Governance scores below 2. Majority of the respon-Quality dents expressed disagreement in the statements in each of the three items. OnThe views of the respondents on the the whole, the overall mean score ofquality of public governance in Nigeria 2.01 and standard deviation of .73 onwere expressed in items PGQ1 to public government quality suggestedPGQ17 and the result of the descriptive that the respondents perceived the qual-analysis of the items are presented in ity of public governance low.table4. Specifically, the result revealsthat the perception of the respondentsabout the quality of democracy and ac- Risk Preferencecountability in Nigeria as indicated initem PGQ1, 2&4 was low and this is The preferences of the respondents to takereflected in the weak mean scores of risk were appraised using item RP1to RP51.92, 1.96 and 1.97 respectively. On and the result of the descriptive statistics on
J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24 15 Table 5 Descriptive Statistics for Public Governance QualityCode Items M Std D S A/ Neutral S D/ Agree DisagreePGQ1. I trust the National Assembly in making 1.92 1.13 32(10) 55(16) 245(74) good laws for Nigeria.PGQ2. There is free and fair election in Nigeria. 1.96 1.11 31(19) 54(16) 247(75)PGQ4. I have access to the published accounts 1.97 1.18 38(12) 63(19) 231(69) and annual report of Federal Government.PGQ5. I am not satisfied with quality of general 2.45 1.35 76(22) 68(21) 188(57) infrastructure in Nigeria.PGQ7. I am satisfied with the manner the 2.31 1.22 60(18) 77(23) 195(59) govt. is handling the health servicePGQ8. I am satisfied with the manner the govt. is 2.35 1.32 64(19) 76(23) 192(58) handling the education system.PGQ9. I trust the financial honesty of Nigerian 2.01 1.19 40(12) 66(20) 226(68) politicians.PGQ10. There is no diversion of public funds due 1.99 1.20 40(12) 59(18) 233(70) to corruption is common in NigeriaPGQ12. Political stability is declining in Nigeria 1.97 1.12 31(9) 73(22) 229(69)PGQ14. Ethnic and religious conflict is not a threat 1.67 0.90 13(4) 55(17) 264(80) to stability in NigeriaPGQ15. Nigeria’s Judiciary is free interference of 1.85 1.07 26(7) 54(17) 252(76) other arms of governmentPGQ16. Justice is fairly administered in Nigeria 1.84 1.08 28(8) 48(15) 256(77)PGQ17. Nigerian police force is effective in 1.95 1.17 38(12) 58(18) 236(70) combating crime Overall 2.01 0.73Note:1. M=Mean ,Std D= Standard Deviation, SA= Strongly Agree, SD= Strongly Disagree 2.Percentage in parenthesis Table 6 Descriptive Statistics for Risk PreferenceCode Items M Std D S A/ Neutral S D/ Agree Disagree Indicate the extent to which any of the following have ever applied to you.RP1 Health risks ( eg smoking, poor diet, 1.81 1.26 37(11) 44(13) 251(76) high alcohol consumption).RP2 Financial risks (eg gambling, 1.95 1.36 49(15) 42(13) 241(72) risky investment).RP3. Career risks (eg quitting a job 1.92 1.32 48(15) 47(14) 237(71) without another to go to)RP4. Safety risks ( eg fast driving, city 1.96 1.34 52(16) 46(14) 234(70) cycling without a helmet)RP5. Social risks (eg standing for election, 1.96 1.35 53(16) 48(15) 231(69) publicly challenging a rule) Overall 1.91 1.12Note:1. M=Mean ,Std D= Standard Deviation, SA= Strongly Agree, SD= Strongly Disagree 2.Percentage in parenthesis
16 J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24these items (see table6) indicate that each of from salaries whose tax is withheld atthe items has mean score below 2. On dis- point of payment and they did not con-agreement scale, majority of the respondents sider it necessary to report other extract(76%) did not agreed taking health risk of source of income for tax. Table 7 alsosmoking etc (RP1) while at the agreement indicates that about 48% of the respon-scale, 16% of respondents agreed to haveengaged in social risk. On the whole, the dents fully complied with tax rules re-overall mean score of 1.91 and standard de- garding return filing while the remainingviation of 1.12 suggested that the respon- 52% of the respondents complied withdents were risk averse. the tax rules regarding to return filing either moderately or somewhat as such were noncompliant. This result is notTax Compliance Behavior surprising considering that great number of the respondents were salary earnersThe compliance behavior of the respon- and had their taxes deducted at point ofdents towards tax rule and regulations payment perhaps this might have influ-are presented in table 7. The table re- enced their behavior . Unexpectedly, theveals that about 28% of the respondents analysis on tax payment compliance in-complied with tax rule and regulations in dicates that about 40% of the respon-declaring their income for tax purpose dents fully complied leaving 60% asand this leaves about 76% of the respon- noncompliant. This result may reflectdents as noncompliant. The same result the fact that majority of the respondentsas in income reporting compliance was had their income tax deducted throughobtained on tax claims reporting as only Pay As You Earn (PAYE) scheme.minority (22%) of the respondents were However, in the overall compliance,compliant. This result was expected con- only about 11% of the respondents com-sidering the close association between plied with income reporting, tax claimstax income reporting and claims report- reporting, return filling and tax paymenting: tax claims normally accompany in- as stipulated by tax rule and regulations;come reporting. Moreover, the result therefore leaving majority of the respon-reflected the fact that most of the re- dents (89%) as noncompliant. The resultspondents (52%) derived their income indicates that tax noncompliance is great Table7 Descriptive statistics for Tax Compliance Behavior NoncomplianceComponent M SD Somewhat Moderately Compliance Compliance ComplianceIncome Reporting 2.00 0.74 90(27) 149(45) 93(28)Tax Claims Reporting 1.86 0.75 120(36) 140(42) 72(22) Return Filing 2.19 0.85 94(28) 80(24) 158(48) Tax Payment 2.16 0.78 79(24) 120(36) 133(40)Overall 2.06 0.59 94(28) 238(61) 36(11)Note:1) Percentage in parenthesis 2) M= Mean, SD= Standard Deviation
J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24 17problem in Nigeria and this result is and Hair et al (2010) as supported byclosed to the estimate of 91% as non- Evans (1987). In this case, tax compli-compliance rate in Nigeria by Asabe ance behavior was regressed on public(2005). governance quality in the first stage to obtain the main effect while in the sec- ond stage; the dependent variable wasModerated Multiple Regression regressed on independent variable, mod- erator(s) and the product of the inde-To test the hypotheses on the direct and pendent variable and moderator(s). Be-moderating relationship among public fore the multiple regressions, the con-governance quality, financial condition, tinuous variables were centered to re-risk preference and tax compliance be- duce the effect of multicollinearity ashavior, moderated multiple regression suggested by Aiken &West (1991). Theanalysis was used following process rec- results of the regressions are presentedommended by Darrow& Kahl (1982) in table 8,9 and10. Table 8Result of Multiple Regressions for the Moderating Effect of Financial Condition Variable Model1 Model2PGQ .326(6.277)* .432(4.705)*FinCon -.401(-7.533)*PGQX FinCon .077(.880) R2 .242 .244Adjusted R2 .238 .237Change R2 .242* .002F Value 52.558* 35.273*Note: (1). *p<. .01,** p< .05,*** p< .10 (2) T Statistics in parenthesis. (3) PGQ= Public Gov-ernance Quality, FinCon= Financial Condition, RP= Risk Preference Table 9 Result of Multiple Regressions for the Moderating Effect of Risk PreferenceVariable Model1 Model3 *PGQ .326(6.277) .318(5.963)*RP .086(1.558)PGQ X RP -.101(-1.864)*** R2 .107 .118Adjusted R2 .104 .110Change R2 .107* .009***Note: (1). *p<. .01,** p< .05,*** p< .10 (2) T Statistics in parenthesis. (3) PGQ= Public Gov-ernance Quality, FinCon= Financial Condition, RP= Risk Preference
18 J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24In table 8, the result of the main effect dition (ȕ = -.401; P<.01) has negativeand the moderating effect of Financial relationship with tax compliance behav-Condition is presented and in model 1, ior. The result also indicates that finan-the result indicates that public govern- cial condition (ȕ = .077; P>.10) has posi-ance quality (ȕ = .326; P<.01) is positive tive but not significance moderating ef-significantly related to taxpayers’ com- fect on the relationship between publicpliance behavior hence this result sup- governance quality and tax complianceport hypothesis H1 and this result is con- behavior as a result fails to support H2.sistent with submissions of Akpo,(2009), Bird&Zito,(2005), and Everest- Risk preference was included in model 3Phillip& Sandall (2009). In model 2, fi- as a moderator (while holding financialnancial condition and the product term condition constant) and the regressionof public governance quality and finan- result shows that the relationship be-cial condition were entered and the re- tween risk preference and tax compli-gression result reveals that financial con- ance behavior (ȕ = -.86; P<.10) is nega- Table 10 Result of Multiple Regressions for the Joint Moderating Effect of Financial Condition and Risk PreferenceVariable Model1 Model4 PGQ .326(6.277)* .517(9.333)* FinCon -.409(-7.375)* RP -.038(-.686) PGQX FinCon X RP -.036(-.651)R2 .107 .246Adjusted R2 .104 .237Change R2 .107* .001F Value 39.361* 26.642*Note: (1). *p<. .01, **p< .05,*** p< .10 (2) T Statistics in parenthesis. (3) PGQ= Public Gov-ernance Quality, FinCon= Financial Condition, RP= Risk Preferencetive but not significant. Furthermore, the compliance behavior significantly in theresult also indicates that risk preference model 4(ȕ = .517; P<.01) . The results(ȕ = -.101; P<.10) has significant nega- also indicate that financial condition istive moderating effect on relationship negatively related to tax compliance be-between public governance quality and havior significantly in the model ( ȕ = -tax compliance behavior, therefore this .409; P<.01) while risk preference alsoresult support H3. to show negative but not significant rela- tionship with tax compliance behaviorTable 10 presents the results of regres- ( ȕ = -.38; P>.10). Furthermore, table10sion on model 4 with financial condition also indicates that financial conditionand risk preference as joint moderators and risk preference have insignificantand as with other models, public govern- joint positive moderating effect ( ȕ = -ance quality is still positive related to tax .36; P>.10) on the relationship between
J. O. Alabede, Z. Zainol Ariffin, K. Md. Idris / Issues in Social and Environmental Accounting 1/2 (2011) 3-24 19public governance quality and tax com- ing compliance behavior of individualpliance behavior hence this study do not taxpayers, however the quality of publicsupport H4 governance is below expectation in most developing countries including Nigeria (Rotberg& Gisselguist, 2009) hence5. Implications and Conclusion shrinking level of compliance in these countries. Another distinctive contribu-This study expanded the basic tax com- tion from this study is the transformationpliance model to incorporate public gov- of the relationship between public gov-ernance quality and moderating effects ernance quality and tax compliance fromof financial condition and risk prefer- positive to negative significantly by theence. These new variables were care- interacting effect of risk preference. Thisfully chosen to meet the environmental, result demonstrates the important mod-situational and social reality in some erating role of taxpayer’s risk preferencedeveloping countries particularly Nige- in the relationship between public gov-ria. Indeed, the study has proved the ernance quality and tax compliance andsuggestions of Alm (1999) and Jackson this role cannot be underestimated theo-& Millron (1986) that other factors out- retically .Moreover, this provide proof toside basic model may influence tax com- researchers that it is possible that somepliance behavior right. In the first place, other factors may have moderating ef-the study has provided empirical support fects on the relationship between taxfor the existence of strong positive rela- compliance and its determinants as sug-tionship between public governance gested in Kirchler et al (2007).quality and taxpayers’ compliance be-havior and furthermore that taxpayers’ Practically, the present study suggestsrisk preference also has significant nega- that improvement in public governancetive moderating effect on the relation- quality in some developing countriesship between public governance quality including Nigeria is the best strategy ofand tax compliance behavior. Although reawakening the culture of tax compli-the moderating effect of financial condi- ance among individual taxpayers. Fur-tion on the relationship between the two thermore, policy makers may also bevariable is positive as expected but not concerned with mapping policy to miti-significant. The same insignificant result gate the negative effect of risk prefer-was equally obtained for joint moderat- ence on the relationship between publicing effect of financial condition and risk governance quality and tax compliancepreference. These findings have some behavior.interested theoretical and policy implica-tions. This study has a number of limitations. In the first place, the focus of this studyIn the first place, the findings have was on individual taxpayers but corpo-proved that environmental, situational , rate taxpayers may have different opin-social and cultural factors play important ion, perception and behavior from therole in influencing tax compliance be- individual taxpayers. In addition, thishavior not only economic factors as as- study relied on self-reported behavior ofsumed in deterrence theory. Public gov- the taxpayers like most compliance re-ernance quality plays vital role in shap- searches. The behavior that taxpayers
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