BAHIR DAR UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

DETERMINANTS OF TAX COMPLIANCE BEHAVIOR AMONG

TAXPAYERS: THE CASE OF CATEGORY “B” TAXPAYERSIN
AMHARA NATIONAL REGIONAL STATE BAHIR DAR TOWN
ADMINISTRATION REVENUE AUTHORITY

BY: ANTENEH SEMA

JAN, 2021

BAHIR DAR, ETHIOPIA

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 Determinants of Tax Compliance behavior among taxpayers: in
Case of Category ‘B’ Taxpayers in Amhara National Regional State
Bahir Dar Town Administration Revenue Authority

By: Anteneh Sema

Advisor: Abebe Wale (Ato)

A thesis submitted to Bahir Dar University College of Business and Economics

Department of Accounting and Finance in Partial fulfillment of the
requirements for the degree of Masters of Science in Accounting and finance

Jan, 2021

Bahir Dar, Ethiopia

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 BAHIR DAR UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

DECLARATION

I, Anteneh Sema Woretaw, hereby declare that the thesis work entitled “Determinants of Tax
Compliance Behavior Among Taxpayers: The Case Case of Category ‘B’ Taxpayers in Amhara
National Regional State Bahir Dar Town Administration Revenue Authority submitted by me for
the award of the degree of Master of Science in Accounting and Finance of Bahir Dar University
University at Bahir Dar Ethiopia, is original work and it hasn’t been presented for the award of
any other Degree, Diploma, Fellowship or other similar titles of any other university or
institution.

Name: Anteneh SemaWoretaw Signature: ______________

This master thesis, has been submitted for examination with my approval as thesis

Advisor’s Name: Abebe Wale (Ato) Signature: _______________

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 Certification
Bahir Dar University
School of Graduate Studies

This is to certify that the thesis prepared by Anteneh Sema Woretaw, entitled: Determinants of
Tax Compliance Behavior Among Taxpayers: In Case Case of Category ‘B’ Taxpayers in
Amhara National Regional State Bahir Dar Town Administration Revenue Authority and
submitted in partial fulfillment of the requirements for the Degree of Masters of Science in
Accounting and Finance complies with the regulations of the University and meets the accepted
standards with respect to originality and quality.

Approved by:

External Examiner _________________Signature___________Date_________

Internal Examiner _________________Signature___________Date_________

Advisor: Abebe Wale (Ato) Signature___________Date__________

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 Acknowledgment

First and for most, I acknowledge almighty God for showering me with grace and mercies in
every step of my life. I attribute all my successes to his unwavering presence.
I am grateful to all my lecturers and management of Bahir Dar University, College of Business
and Economics for the knowledge and wisdom they have impacted in me. I am in particular
thankful to my advisor, Abebe Wale (Ato) for his constructive and priceless feedbacks and
useful inputs throughout the process of this study.
I am grateful to my parents and rest of my family for the emotional support they provided to see
me this far. I also would like to acknowledge my fellow classmates, colleagues, and friends
especially indebted to Chalachew S., Ewunetu, Moges, and Abraham Alamirew.

Anteneh Sema

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 Abstract
This study aims to examine the relationship between tax compliance and its determinant factors
in Amhara National Regional State Bahir Dar Town Administration Revenue Authority category
‘B’ tax payers’ case. This study used an explanatory research design in which the cause and
effect relationship between tax compliance and its determinant factors is tested. To do this,
correctional data was collected from a sample of 286 tax payers through survey. The samples
were drawn from a total population of 1006 from category ‘B’ tax payers in Bahir Dar town
using simple random sampling technique. The nature of the research that the researcher follows
is quantitative approach. Having this the data was collected by five scale Likert questionnaire
and analyzed using descriptive analysis (mean and standard deviation) and inferential statistics
(regression analysis), and the respondents believe that the tax system lacks equity and fairness,
there is possibility of detection and penalty, have good motivational posture, have disbelief that
the government spends the tax appropriately and the behavior of other tax payer’s influence their
tax compliance behavior. And respondents have also the knowledge and education level they
have about tax related issues. The regression analysis showed that tax compliance behavior has
significant yet negative relationship with perception of equity and fairness towards the tax
system and insignificant and negative relationship with government spending .Contrary to this,
the influence of peer groups in the surrounding environment, the possibility of detection and
penalty, motivational posture and knowledge & education are found to have positive and
significant relationship with tax compliance behavior. Due to the fact that the most of the
determinant in this study have significant relationship with tax compliance, it is recommended
that tax authority should set system that makes the tax system equitable and fair. In addition to
this, government should facilitate training to taxpayers and tax authority employees on taxation
helps to create common and better understanding on the major points like, the legal aspects
of taxation, detect non-compliance behavior and reinforce complying behavior, maintain fairness
and equity among taxpayers.

Key Words: Tax compliance, Motivational posture, Tax Avoidance, Tax Evasion

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Table of Contents
CHAPTER ONE: INTRODUCTION..........................................................................................................9
1.1 Background of the study....................................................................................................................9
1.2 Statement of the Problem...............................................................................................................10
1.3. Research Questions........................................................................................................................13
1.4. Research Objective.........................................................................................................................14
1.4.1 General objective......................................................................................................................14
1.4.2 Specific Objectives....................................................................................................................14
1.5. Hypothesis of the Study..................................................................................................................14
1.6. Significance and contribution of the study.....................................................................................15
1.7 Scope and Limitation of the study...................................................................................................16
1.8 Organization of the paper................................................................................................................16
CHAPTER TWO: LITERATURE REVIEW............................................................................................17
2.1. Theoretical Review.........................................................................................................................17
2.2. Empirical Review.............................................................................................................................21
2.2.1. Summary of Empirical Studies in the Ethiopian Context........................................................29
2.3. Hypothesis of the Study..................................................................................................................30
2.3.2 Relationship of Tax compliance Behavior with Detection and Penalty..................................30
2.3.3 Relationship of Tax compliance with Motivational Posture...................................................31
2.3.4 Relationship of Tax compliance with peer group behaviour..................................................31

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 2.3.5 Relationship of Tax compliance Behavior with Tax Payers’ Perception on government
spending............................................................................................................................................31
2.3.6 Relationship of Tax compliance Behavior with Equity and Fairness.......................................32
2.4. Conceptual Framework...................................................................................................................32
CHAPTER THREE: RESEARCH METHODOLOGY.............................................................................34
3.1. Introduction....................................................................................................................................34
3.2. Research Approach.........................................................................................................................34
3.3 Research design...............................................................................................................................34
3.4 Target population and sampling......................................................................................................35
3.4.1 Target population....................................................................................................................35
3.4.2 Sample size...............................................................................................................................35
3.5 source of data and collection method.............................................................................................35
3.6 Method of Data Analysis model specification..................................................................................36
3.6.1 Descriptive analysis..................................................................................................................36
3.6.2 Relationship Analysis...............................................................................................................36
3.6.3 Multiple Regression Analysis...................................................................................................36
3.6.4 Model Specification.................................................................................................................36
3.7 Validity and Reliability.....................................................................................................................37
3.8 Measurements of Variables.............................................................................................................38
CHAPTER FOUR: RESULTS AND DISCUSSION................................................................................40
4.1. Demographic Information..............................................................................................................40
4.1.1 Response Rate..........................................................................................................................40
4.1.2. Sex of the Respondents..........................................................................................................40
4.1.3 Age of the Respondents...........................................................................................................41
4.1.4 Educational level of the Respondents.....................................................................................41
4.2. Descriptive statistics for the study variables...................................................................................42
4.3. Model Fitness Measurement..........................................................................................................42
4.3.1 Examination of Data................................................................................................................42
4.3.2. Data Testing.................................................................................................................................43
4.3.3 Reliability Analysis...................................................................................................................43
4.3.3.2 Test of Normality...................................................................................................................46
4.4. Regression Analysis Model.............................................................................................................52

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 Regression Model.............................................................................................................................53
4.5 Analysis of Variance.........................................................................................................................53
Regression Coefficients...................................................................................................................54
4.6. Discussion on findings.....................................................................................................................55
CHAPTER FIVE: CONCLUSIONS AND RECOMMENDATION.........................................................57
5.1. Conclusions.....................................................................................................................................57
5.2 Recommendations...........................................................................................................................58
5.3 Future Area of Research..................................................................................................................59

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 List of Tables
Table 4.1 Response rate………………………………………………………………………40
Table 4.2: Sex of the Respondents…..……………………………………………………….40
Table 4.3: Age of respondents…….………………………………………………………….41
Table 4.4: Respondent’s Educational Level……………..…………………………………41
Table 4.5. Descriptive statistics….………………………………………………………….42
Table 4.6 Reliability Coefficients………………………..………………………………...44
Table 4.7 Correlation …..…………………………………………………………………...44
Table 4.8. Test of Normality….……………………………………………………………..47
Table 4.9 Assessment of Normality…………………….…………………………………47
Table 4.10 Assessment of Normality………………….…………………………………..48
Table 4.11. Whites Test for Homoskedasticity….…….………………………………….49
Table 4.12: RESET Test for Omitted Variables………….………………………………….51
Table 4.13: Regression Result Table….…………….…………………………………….53
Table 4.14 Analysis of Variance….………………………………………………………..54
 List of Figures

Figure 2.1: Conceptual Framework…………………………………………………………33

Figure 4.1. Histogram showing normality of residuals……………………………………..46
Figure 4.2: Dot Plot Showing residuals versus fitted values……………………….………52

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 List of acronyms and abbreviations
ANOVA –Analysis of variance

KE - Knowledge and education

EF - Equity and Fairness

PGB - Peer Group Behaviors

DP- detection and penalty

MP- is motivational posture

GS-Government Spending
OLS-Ordinary least square

OBS-observations

STD DEV –Standard deviation

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 CHAPTER ONE: INTRODUCTION
1.1 Background of the study
Tax is a mandatory payment by the people for which there is no direct return to the taxpayers or
tax is a compulsory financial obligation imposed by the government without any expectation of
return (Saleemi, 2008). Tax imposes a personal obligation on the people who are liable to pay it
(Tilahun, 2019).
The act of levying taxes, called taxation, is believed to be central for the economic, social and
political development of country. There are three important roles that a strong taxation system
can play in national development. These are revenue generation, lessening inequality and
promoting good governance (Edward, Christian, Mbekomizel&Ifezue, 2015). The preference of
the government in terms of redistribution of wealth and equity is revealed by the structure of the
tax system. It also measures the amount of resources available for social protection and shapes
the size of the welfare state. Governments may try to use tax policy to encourage certain types of
economic behavior, considering its impact on economic decisions. In the analysis of the
relationship between the state and the society, tax policy provides an invaluable point of
observation (Lamb, Lymer, Freedman, & James Eds., 2005).

In order to account for social programs and public investments governments need sustainable
sources. To achieve the common goal of a prosperous, functional and orderly society it, it is
important to have programs that are providing health, education and infrastructure services.
Taxation is a key ingredient in the social contract between citizens and the economy. Besides it
is used to provide public goods and services. Thus, how taxes are collected or raised and spent
can determine government legitimacy. In order to encourage the effective administration of tax
revenues and, more widely, good public financial management the governments must be
accountable (World Bank, 2018).

However, there has been growing concern for tax authorities and public policy makers with
regard to tax compliance as tax evasion seriously threatens the capacity of government to raise
public revenue (Chau & Leung, 2009). According to Brown and Mazur (2003), tax Compliance
is not a one-sided measure, rather it has many sides to it and theoretically it can be defined by
considering three distinct types of compliance such as payment compliance, filling compliance,

4
and reporting compliance of tax. Tax compliance is a true reporting of the tax base, correct
computation of the liability (accuracy), timely filing of the return, and timely payment of the
amounts due (timeliness) (Tilahun, 2019). On the other hand (Palil& Mustapha, 2011) describes
tax compliance as an individual act of filing tax returns, accurately declaring all income for tax
purposes and paying tax liabilities on the due dates as stipulated by the authority or applicable
tax laws.
Tax compliance is determined by ethics, legal environment and other situational factors (Song
and Yarbrough 1978). In accordance with the laws, regulations, and court decisions the scope of
tax compliance includes, reporting income and paying all taxes (Sub-group, 2004). Voluntary
compliance of the public to the tax laws has been deemed to be the most cost-effective means of
collecting taxes. The administration of the tax system will be more expensive whenever we use
enforcement activities to collect tax (Alink& van Kommer, 2015).

The government collects tax to finance its operation and provide public services. But it is facing
difficulty in collecting the required amount of tax due to the non-compliance behavior of tax
payers (Tilahun, 2019).
Consequently, this paper is set to investigate factors affecting tax compliance behavior of tax
payers in the Ethiopian context more specifically in Bahir Dar town administration. Tax payers
are categorized under category A, B and C, tax payers. The current study however collects data
from category “B” tax payers at Bahir Dar town administration.

1.2 Statement of the Problem

Mobilizing revenue is a way for governments to create fiscal space, provide essential public
services, and reduce foreign aid and single resource dependence. There is an urgent and obvious
need for more revenues to enable resource poor states to provide and maintain the most basic
public services and ensure economic development. Among others, tax as financial assets of a
state and play vital role in providing these services and promote country’s development
(Nurkhinet al., 2018). The reality is however different in that those with political power and
economic ability are few and do not want to pay tax. Moreover, those without political power are
many and do also resist paying taxes (Fjeldstad & Rakner, 2003). The domestic tax bases in most

5
African countries are undermined by widespread tax avoidance and evasion (Ali, Fjeldstad,
Sjursen, &Insitute, 2013).

The Ethiopian tax collection performance is not different and has been below expected level
(Tadesse and Hagos, 2015). According to the African Economic Outlook (2015) report, the
contribution of tax to the Ethiopian GDP is significantly lower than the amount it should
contribute and even lower than Sub-Saharan countries. This is partially due to the fact that tax
payers do not pay the amount they are expected to pay (Tadesse & Goitom, 2015).
They further claimed that tax non-compliance has been seriously affecting the performance of
the country in raising revenue to support its economic development. These facts are indications
that tax non-compliance is among the current issues that need more attention as it causes more
problems to the economy of the country if it is not addressed.

Tax noncompliance is a burning issue especially in developing country who get most of the
finance from external aid. Ethiopia, like any other developing countries, faces difficulty in
raising revenue to the level required for the promotion of economic growth through making
different tax reforms for improving revenue generation, enhancing the efficiency of tax
administration and improving equity in the tax system (Orkaido Deyganto, 2018).

Tax noncompliance is a growing concern for Ethiopia tax authorities and public policy makers
since it seriously threatens the capacity of governments to raise required public revenue (ERCA,
2015). Tax seriously slackening tax administration and tax revenue performance in Ethiopia, as it
does in some other developing countries. Ethiopia has experienced a reliable surplus expenditure
over revenue for a sufficiently long period of time (Tadesse & Goitom, 2014). The actual tax
revenue as a share of GDP (approximately, 13 %) is low compared to that of the average for
Sub- Saharan African and low-income countries which is about 15.1% (World Bank Group,
2016, IMF 2018). The share of tax revenue in GDP hardly changed, suggesting that tax revenue
has failed to grow as much as expected (World Bank Group, 2015).

Currently the government of Ethiopia is not collecting enough tax (Kaberuka, Gurría, Clark,
2015) due to non-compliance behavior of tax payers (Tadesse & Goitom, 2015; IMF, 2015).

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There has been series of studies conducted to analyze and identify the determinants of tax
compliance behavior in different category of tax payers in Ethiopia (Tadesse and Goitom, 2014;
Geletaw, 2015; Redae and Sekhon, 2015; Niway & Wondwossen, 2015), but the results show
inconsistency as to which factor determines tax compliance behavior. For example, Tadesse and
Goitom (2014) identified factors such as the probability of being audited, perception of
government spending, perception of equity and fairness, penalty and tax knowledge and
concluded that tax knowledge has not significant effect. Geletaw (2015) six tax compliance
determinants such as tax knowledge; feeling of fairness; the influence of peer groups; income
level of taxpayers; detection & punishments and conclude that perception on government
spending has not significantly related. Redae and Sekhon (2015) found tax knowledge to have
significant relationship. Niway & Wondwossen (2015) identified tax knowledge, simplicity of
tax returns and administration, perception on fairness and equity, perception on government
spending, probability of auditing, and the influence of referral group as determinant factors that
influence voluntary compliance behavior. Habtamu (2016) also identified four factors including
trust and power of tax authority, tax knowledge and education, fines and penalties and perceived
fairness of tax system. Akalu (2016) identified business size, business age and tax psychological
cost, tax liability, compliance cost and tax rate structure are significant determinants in at least
one type of non- compliance behavior. Business sector, tax complexity, fairness in the tax rate/
tax system and tax deterrence sanctions have an insignificant relationship with the non-
compliance behavior. Kanbiro (2018) found gender, age, lack of tax knowledge, simplicity of tax
system, awareness on penalty, probability of being audit, and perception on tax rate were found
to be key factors influencing taxpayers voluntary compliance attitude.

Variables such as education level, tax authority efficiency, peer influence, occupation, income
level of taxpayers, perception on government speeding, and perception on fairness and equity
have no significant influence on tax voluntary compliance attitude. According to Ezana (2018)
fairness/equity, fines & penalties, compliance cost, liquidity, the strength of the tax authority,
knowledge/ awareness level of tax payers, socio- cultural factors and gender of taxpayers were
found to be the determinant factors that affect taxpayer compliance. Finally, Abdu &Wondimu
(2019) showed that tax compliance was positively affected by education level of tax payers, tax
knowledge and awareness of tax payers, simplicity of the tax system, attitude of tax payers

7
towards tax, perceived role of government expenditure, and rewarding scheme for loyal tax
payers. Though those researchers in the Ethiopian context identified factors affecting tax
compliance behavior, the results are not similar implying the existence of a gap as to which
factors are significant in affecting tax compliance behavior. This led the current study to make
further study to identify significant factors affecting tax compliance behavior in the Ethiopian
context. Consequently, six factors such as knowledge and education of tax payers, equity and
fairness of the tax system, motivational posture of tax payers, detection and penalty, peer group
influence and perception on government spending have been included in this study as relevant
factors in the Ethiopian tax compliance case. These factors are selected based on previous
findings, personal experience and observation and from the tax payers.

1.3. Research Questions

This study aimed to test the relationship between tax compliance and determinant in Ethiopia tax
payers. In order to address the research problem stated in the previous discussions and identify
the issues that determine tax compliance issues in the Ethiopian tax payers the following research
questions are forwarded. These questions are related to the possible determinants of tax
compliance. However, only determinants which have been revealed as highly relevant in the
literatures are included here. This study tried to answer questions in its finding through the
questions raised here.
1. Does the tax knowledge and education of tax payers affect tax compliance behaviors?
2. Does equity and fairness in the tax system of the country affect tax compliance behavior?
3. Does peer group behaviors relate to tax payment affects tax compliance behavior?
4. Does the detection and penalty affect tax compliance behaviors?
5. Does motivational posture used by the tax authority affects tax compliance behaviors?
6. Do the perception of tax payers on government spending impacts tax compliance behavior?

1.4. Research Objective

1.4.1 General objective
The general objective of this study is to examine the determinant of tax compliance behaviors in
the Ethiopian tax system. In doing so, six determinants are identified from the tax literature and
empirical evidences in the Ethiopian tax system.

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1.4.2 Specific Objectives
This study specially aimed at:-
1. Testing the relationship between knowledge and education and tax compliance.

2. Examining relationship between equity and fairness and tax compliance behavior.

3. Testing the relationship between peer group behaviors and tax compliance behaviors.

4. Testing the relationship between detection and penalty and tax compliance behaviors.
5. Testing the relationship between motivational posture and tax compliance behaviors.

6. Testing the relationship between perception of tax payers on government spending and tax
compliance behavior.

1.5. Hypothesis of the Study

In The following section the study forwards hypothesis for the relationship between tax
compliance and variables affecting it. Issues of how each hypothesis are evolved from
background theories are discussed in detail in chapter two.
H01: “Tax knowledge and education of tax payers have positive and significant effect on tax compliance
behaviors of tax payers”.

H02: “Detection and penalty of tax non-compliance behaviors have positive and significant effect
on tax compliance behavior of tax payers

H03: “Motivational posture of tax payers has positive and significant effect on tax compliance
behavior of tax payers”

H04: “Peer group behaviors related to tax payment have positive and significant effect on tax
compliance behaviors of tax payers.”

H05: “Perception of tax payers on government spending has positive and significant effect on tax
compliance behavior of tax payers”

H06: “Equity and fairness in the tax system of the country have positive and significant effect on
tax compliance behavior of tax payers”

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1.6. Significance and contribution of the study
There is evidence that non-compliance with tax laws is one of the urgent issues that requires
more attention, as it poses major problems for the country's economy if it is not addressed by
stakeholders. Previous research on what drives taxpayer behavior in Ethiopia has been
controversial. Different studies have shown different results in identifying factors that influence
tax compliance behavior in the Ethiopian context. Therefore, in this study, there are six relevant
factors that are expected to influence tax compliance behavior from previous research in tax
publications from both Ethiopia and others. Therefore, the research has both practical and
academic contributions. This means that identifying the determinants of tax compliance helps
both tax administrators and researchers in the field to design effective tax systems that take these
issues into account.
In contributing to practice, tax policy makers and tax administrators have the opportunity to
identify factors that influence the tax compliance behavior of Ethiopian taxpayers and make
appropriate procedures and decisions to achieve what is desired. As a result, the tax collection
performance of the authority will be improved and the tax revenue to support the country's
economic development will increase.

The results of this study also contribute to the literature by helping to identify the issues that
determine taxpayer tax compliance behavior in the context of developing countries, assuming
similar contexts. .. Such studies will help the literature to more completely and comprehensively
investigate tax compliance behavior and its determinants in a variety of situations. Knowledge of
the factors that determine the tax compliance behavior of Ethiopian taxpayers can also be applied
to other countries.

1.7 Scope and Limitation of the study

The current study addresses only category “B” tax payers and does not include category “A” and
category ‘C’ tax payers due to the fact that significant amount of tax is collected from these
group and convenient to get the data easily. Furthermore, this study covers only tax payers
located at Bahir Dar town administration, federal tax payers are not included. As a result, the
generalizability of the findings of this study is limited to the tax payers included here. It may not

10
be applied to other category tax payers due to the fact that they may have their own
characteristics related to their size that makes them different in their tax compliance behavior.

1.8 Organization of the paper

The paper contains five chapters. Chapter one cover introduction part which include background
of the study, statement of the problem, research Questions, research objective, hypothesis of the
study, significant of the study and scope and limitation of the study. The second chapter contains
Literature review. The third chapter covers methodology. The fourth chapter covers data analysis
and discussions and the last chapter addresses conclusions and recommendation of the study.

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 CHAPTER TWO: LITERATURE REVIEW
2.1. Theoretical Review
Everywhere in the world, whether rich or poor, people cannot run away from the reality of
sharing the use of public goods and services; this in turn imposes on individuals the need to be
putting some percentage of income into a government fund account. Examples of the public
goods that people use are roads, municipal services, power, and other public infrastructures
which have favorable results for many families, industries, business enterprises and the general
public. The supply of such public good is mainly done by government or public agencies this is
because of their non-rivalry and non-excludability nature. The goodness of using public goods is
that as one person uses there is no reduction in terms usage for others. It also has to be noted that
the usage or consumption of public goods government or public officials does not exclude others
from doing same as the term suggests it is for the public and not meant for only one person.
However, there are public goods or services whose nature then makes it impossible for private
suppliers to benefit from due to the market prices like other commodities. As (Jira, Fantahun,
Dieter, Gerhard, 2005) rightly puts it “Government involvement in the supply of public goods is
inevitable and can only be done if the public pays taxes for the production and supply of such
goods”.

Throughout history, Taxes have been recognized as the basis of the country’s development.
Consequently, the issue of tax calculation, tax debts and other related tax administration will give
a huge problem for the government and revenue authority offices (Redae, Redae, &Sekhon,
2015). The Dominant idea as far as tax is concerned in the 19th century was that taxes should
serve mainly to finance the government, nevertheless today governments have utilized taxation
in other than merely fiscal purposes also according to American economist Richard A. Musgrave
the purpose of taxation is, attributable to the objectives of resource allocation, income
redistribution and economic stability than just fiscal purposes (Charles et‟al., 2019) .
Reporting of all incomes and payment of all taxes by fulfilling the provisions of laws, regulations
and court judgments is what is normally regarded as tax compliance (Alm, Bloomquist, &Mckee,
2013). The in-depth definition of tax compliance as put by (Song and Yarbrough 1978) is the
taxpayers‟ ability and willingness to comply with tax laws which are determined by ethics, legal
environment and other situational factors at a particular time and place. There are three distinct

12
types that lead to the consideration of tax payer’s compliance namely: payment compliance;
filing compliance; and reporting compliance. Together these three mutually exclusive and
exhaustive measures provide a comprehensive look at overall taxpayers’ compliance, which
would feed into estimates of the Tax Gap (Brown and Mazur, 2003).

Compliance can be voluntary or enforced compliance. Voluntary compliance comes in when

there is trust and cooperation between the tax authority and taxpayer and it also largely depends
on the willingness of the taxpayer to comply with tax authority’s directives and regulations. On
the other hand, enforced compliance is normally used where there is a presence of distrust and
lack of cooperation between authority and taxpayer, this in turn creates tax hostile climate, which
eventually allows authorities to enforce compliance through threats and application of audit and
fine (Kirchler, 2007).

Tax compliance has also been divided into two perspectives, namely compliance in terms of
administration and compliance in terms of completing (accuracy) the tax returns. Compliance in
pure administrational terms therefore includes registering or informing tax authorities of status as
a taxpayer, submitting a tax return every year (if required) and following the required payment
time frames. In contrast, the wider perspective of tax compliance requires a degree of honesty,
adequate tax knowledge and capability to use this knowledge, timeliness, accuracy, and adequate
records in order to complete the tax returns and associated tax documentation (Geletaw, 2015).

Mcbarnet (1998) also suggested that tax compliance should be perceived in three ways, namely;
a) Committed compliance - taxpayers‟ willingness to pay taxes without complaint;
b) Capitulated compliance - unwillingly giving in and paying taxes and
c) Creative compliance -engagement to reduce taxes by taking advantage of possibilities to
redefine income and deduct expenditures within the bracket of tax laws.

To achieve compliance level of tax, it is imperative to identify the most important determinant
factors of tax compliance. In theory, there are different models that show factors affecting tax
compliance. In the current study theoretical foundations/models for explaining tax compliance
behavior are reviewed. The different models also put across different factors which facilitating in

13
explaining the tax compliance behavior of tax payers. However, there is no „one model fits all‟
to enlighten more on the tax compliance behavior. There can never be one universal‟ model for
studying compliance behavior, as several factors usually influence individuals‟ decision to
comply (or not) with tax payments. These factors typically vary from country to country and
from one situation to another. The current models that help in the study of tax compliance have
(individually and collectively) given more insights into understanding taxpayer compliance,
hence tax compliance researchers can choose on whether to combine the models that best suit
their setting and situations facing them.
Different theories/models have been used to explain tax compliance. However, there are only
five models/theories of tax compliance which have been mostly adopted in the tax compliance
research (OECD Forum of Tax Administration, 2010) and these are Deterrence; Social
Psychology, Fiscal Exchange, Comparative Treatment, Political Legitimacy and Trust in
Government. These models present arguments as to how tax compliance is explained and which
factors are logically related to it. The following section discusses each models/theory briefly.

I. The (Economic) Deterrent Model

Behavior is influenced by factors such as, tax rate (which determine the benefit of tax evasion)
and penalties for fraud and probability of detection (which determine costs) is the theory of the
economic or deterrent model. The economic deterrent model believes and views that the
individual taxpayer as a rational economic agent, who measures the costs (determined by
probability of detection and penalties for fraud) and benefits (determined by tax rate) of evading
taxes. And the choice to pay or not to pay depends on respectively on the cost of noncompliance
higher than paying or the benefit of non-compliance outweighs the costs (Walsh, 2012).
However, with this assumption the down-side is that the tendency for evasion will be higher
when there are low audit probabilities and low penalties and if there is a high tendency for
detection and penalties are severe, fewer people will evade taxes (Fjeldstad, Schulz-Herzenberg
and Sjursen, 2012).

II. Social-psychology Models

This is the theory of reasoned action and it states and suggests that individuals form their
behavioral intentions on the bases of two basic determinants which is personal factors and social

14
influences (McKercher and Evans, 2009). The two determinants are commonly referred to as
personal norms and social norms respectively and they have become the focus of studies based
on social psychology theories explaining taxpayer behavior. Personal norms are defined as the
actual rooted beliefs or thinking about what one should do or not to do (OECD, 2010).
According to (Franzoni, 1999) They are in most cases difficult to change and often beyond the
reach of public policy, since they take a long time of socialization processes to be developed
(OECD, 2010).Personal norms show the taxpayers values, tax ethics, tax mentality, and tax
morale in the context of taxpayer behavior which influences attitudes towards tax compliance.
According to Sour (2004) contended that whenever involved in the acts of evasion might bring
feelings of anxiety, guilt or negative self-image in taxpayers.

Social norm, according to Alm (1999) is a pattern of behavior that is judged in a similar way by
others and therefore sustained in part by social approval or disapproval. So, for people who are
commonly discuss their tax issue with friends, family members, and work collages are affects tax
compliance (Sour, 2004). Therefor the taxpayer’s choice laid on two fold as it is based on the
fact that an individual is most likely to comply with tax requirements if he believes members of
his reference groups also comply or just as he is also likely not to comply if he believes that
members of his referent group do not comply (Bello, 2014).

III. Fiscal Exchange

The fiscal exchange theory is developed from the economic deterrence and the social psychology
models (McKerchar and Evans, 2009), and the government and the taxpayers contract built upon
on the existence of social, relational or psychological contract (Bello, 2014). In this model the
public service that government present is viewed as a motivating factor for taxpayer compliance,
especially when the taxpayers value the goods and services they are receiving from the
government (Bello, 2014). According to Fjeldstad, et al. (2012) the taxpayers may give up some
of its purchasing power in return for government services with the exchange being largely
conditional and varying as the government varies in its performance. From the taxpayer’s point
of view even in the absence of detection and punishment their willingness to comply comes from
satisfaction that is brought by the way of provision of services from the government, (Torgler,
2003). Conversely, terms of trade are likely to be adjusted by means of reducing compliance

15
when they are dissatisfied with services provision from the government, or even when they
dislike the way their taxes are spent (Bello, 2014).

IV. Comparative Treatment

It is believed that tax payers will comply with the law if they perceive the process leading to the
law as generally fair (Bello, 2014). The comparative treatment model main focus is essentially
based on the equity theory (Ali, et al., 2013). Which proposes that individuals are more likely to
exhibit higher tax compliance when they perceive that the entire tax system are fair and lower tax
compliance when they perceive tax system are unfair (Bello,2014). The compliance result on the
influence of perceived fairness of the tax system is not restricted to the treatment of the
individual taxpayer only, but also relays to the tax burdens of other individuals, as well as their
observed compliance behavior (Sour 2004; Walsh, 2012). In order to increased Compliance rate
an individual must perceives his tax burdens to be of about the same magnitude as that of
comparable others (Feld and Frey, 2006), When people believe that their tax burdens are greater
than those of others in the same group then the observed evasion will be increased(Spicer and
Becker, 1980).

V. Political Legitimacy and Trust in Government

According to Bello (2014) political legitimacy is define as the way of having a belief or trust in
the authorities, institutions, and social arrangements to be appropriate, just and work for the
common good. Whenever citizens trust their government and social institutions, the more likely
they will voluntarily stand by the decisions and rules set by such government and institutions, so
this impacts tax compliance decisions (Bello, 2014). Richardson (2008) proposes that
governments need to increase their reputation and credibility, as a means of gaining the
taxpayers trust and compliance level of tax payers.

2.2. Empirical Review

Taxation is the only real alternative than any other thing to pay for the high levels of public
expenditure that modern economies demand. Its objective is maximizing tax compliance,
regardless of other considerations (James S. & Alley C., 2008). One proposal is that the degree

16
of noncompliance may be measured in terms of the tax gap. The tax gup is the difference
between the actual revenue collected and the amount that would be collected if there were100
per cent compliance (James, Alley, & Alley, 2010). According to the C- Sub-group (2004), the
broad categories of taxpayer obligation listed as registration in the system, timely filing or
lodgment of requisite taxation information, reporting of complete and accurate information
(incorporating good record keeping); and payment of taxation obligations on time.

Towards the end of the 20th century government have realized that, in order to increase the
amount of taxes collected a change is required or needed. Instead of strictly applying laws and
regulations using adequate strategies based on understanding the reasons which drive compliance
decisions is of greater help. (Ph,Babe, Babe, & Babe, 2012). Based on the reviews discussed in
the previous sections the following factors are selected as determinants. These factors are
discussed in the following sections.

I. Knowledge and Education of Tax Payers

Tax knowledge is a level of awareness of tax legislation and other important tax-related
information. And it is also the level of sensitivity of the tax payer towards the tax system and tax
legislation. The formal general level of education received by taxpayers is an important factor
that contributes on the understanding of tax requirements particularly on registration and filling
requirements (Oladipupo & Obazee, 2016). Educated taxpayers may be aware of the
consequence of non-compliance and the available opportunities, and their better understanding of
the tax system and higher level of moral development potentially promote them a more favorable
taxpayer attitude and greater compliance (Tadesse & Goitom, 2014).
According to Adam (2012), tax knowledge plays an important role in increasing tax compliance
and it is an important element in a voluntary compliance particularly in determining an accurate
tax liability. Tax knowledge might possibly encourage tax payers to be more practical in
completing their tax returns (Oladipupo & Obazee, 2016). Studies undertaken in Malaysia (Loo
& McKercher, 2014) rose that tax knowledge is the most influential and important factor in
determining taxpayers compliance behavior towards the tax system.

17
Most citizens do not have a clear understanding of what tax laws mean and why the tax system is
structured and administered as it is, so high awareness by the society would encourage people to
fulfill their obligations to register as taxpayer reporting and paying taxes properly and also
reminding them that tax paying is national and civic responsibility, (Oladipupo & Obazee, 2016).
The tax systems are usually not elaborated after proper consultation with the business
community. Therefor business owners do not have simplified access to and clarification on
information of the tax laws, they lack awareness on tax rules and regulations and this has an
impact on the practicability of the regulations. (Jira et al, 2005).

The influence of tax knowledge on compliance behavior has been described in various
researches. Most of the studies on tax compliance are concerned on an intentional non-
compliance but there is still considerable scope for unintentional non-compliance. From all
positive actions required to a full compliance on the part of the taxpayer to discharge his or her
legal duties in full. Sometimes the tax payers innocently fail to meet their tax obligations because
they fail to complete their tax return correctly or unaware of, or misunderstand the various
provisions of the tax system. Consequently, attempts by different tax authorities in assisting
taxpayers to improve tax administration in this respect have often found to be more difficult than
might at first pear (James et al., 2010). In general, the past studies have consensus that tax
knowledge and education improve tax compliance behavior of tax payers.

II. Impact of Equity and Fairness

The total tax burden will be distributed among individuals according to their capacity to bear it
and taking into account all of the relevant personal characteristics is the requirement of “The
ability-to-pay” principle(Newman, W., Charity, M., &Ongayi, W. ,2018).most of the tax payers
complain about the tax assessment method they believed that it is based on subjective estimation
as a result of they are frequently subject to over-taxation (Jira et.al, 2005).Therefore the
importance of public perception has been the motivation for numerous studies that attempted to
identify the determinants of the public perception of tax and to measure the level of perceived
fairness. It is vital for government to have a fair, transparent, accurate and effective tax system in
order to administer, collect, change and manage tax within a country or state”
(McHarmonious,2016, as cited in Habtamu, 2019).

18
One of the main principles of the taxation system design as highlighted by (OrkaidoDeyganto,
2018) is equity or fairness. Equity can be understood through three dimensional views namely
horizontal equity (people who are in the same income or wealth brackets should pay the same
amount of taxes), vertical equity (taxes paid increase with the amount of the tax base or taxable
income) and Exchange Equity (expectation the same share of public service from government for
paying tax).

Spicer & Becker (1980) argued that a higher record of tax evasion and non-compliance is
recorded when taxpayers are aware that their tax rate is higher than average tax rate paid by other
in the same category. Etzioni (1986) also highlighted on the same saying if the public feels that
taxes are being unfairly imposed, it will likely be involved in tax non-compliance behavior and
consequently evade taxes. There has been a firm belief by the tax administrators and the
taxpayers that the growing dissatisfaction with the fairness of tax system is the major cause for
the increase in tax noncompliance (Richardson, 2006). Mutual trust and cooperation between tax
bodies and the taxpayers with regard to tax matters is well built by equity and fairness which
subsequently enhances voluntary compliance (Bello, 2014).

III. Peer Group Influence

When it comes to taxation issues the term peers generally refers to a taxpayer’s associates such
as relatives, friends, co-workers and colleagues (Jackson & Milliron, 1986). Peer groups
normally tend to have influence one’s preferences, behavior and personal values towards tax
compliance (Puspitasari & Meiranto 2014). Compliance of individuals is affected by the
behavior of their “neighbors”, or those about whom they may have information, whom they may
know, or with whom they may interact on a regular basis. There seems to be an influence
relationship when it comes to individuals filing and reporting their taxes, they are willing and
very keen to oblige when they believe that other individuals are also filing and reporting their
taxes conversely, when individuals believe that others are cheating on their taxes, they may well
become cheaters themselves. Understanding compliance behavior requires understanding how
information about one’s neighbors affects two aspects of individual behavior: the reporting
decision and also the logically prior filing decision (Alm et al., 2013).

19
IV. Detection and Penalty/ Administration and Criminal
The reporting standards set by Generally Accepted Auditing Standards stating whether the tax
declarations and financial statements submitted for tax offices are must prepared in accordance
with tax proclamations, regulations and directives. Some circulations and identify circumstances
show that such tax rules and principles have not been consistently applied. In order to check and
assure the application of that standard audit is an important part. The audit objective is:
➢reducing the tax gap
➢ Promote the self-assessment system
➢ feeling the presence of tax administration amongst the taxpayers
➢improving the relationship between the tax administration and the taxpayers

The aim of conducting audit is, to check the reporting is in accordance with the standard and to
identify the gap of the compliance level.

According to Tan & Braithwaite, (2018), Perception of the probability of being caught and
sanctioned has its own impact on the tax payer behavior. Whenever there is a potential penalty
and potential audit system the greater the discouragement for potential tax evasion. Therefore,
taxpayers are aware of the consciousness and offences they are committing when evading tax
and being non-compliant therefore, they might reduce their tendency to evade tax (Tadesse &
Goitom, 2014).

Both the tax payers and tax office who has not discharged his/her duties must accuse by the tax
authority. Whenever there is unwilling taxpayers to comply with the procedures and provisions
of the tax system shall result in imposition of interest, civil or administrative penalties and
criminal offence penalty (Fischer, 1992). If there is a low probability of detection and small

20
expected penalty, the tax payer are likely to be involved in noncompliance behavior (Andreoni,
Erard, Feinstein, Andreoni, & Feinstein, 2013).

V. Motivational Posture
Compliance whether can be voluntary or obligatory behavior. If taxpayers obey only because of
dire threats or punishment even though 100 percent of the tax was paid in line with the tax gap
concept of noncompliance, this would not seem to be proper compliance. They argued that when
taxpayers comply willingly, without the need for enquiries, obtrusive investigations, reminders
or the threat or application of legal or administrative sanctions can be a requirement for a
successful tax administration. Therefore appropriate definition in the degree of compliance with
tax law and administration can be achieved without the actual application of enforcement
(Tadesse & Goitom, 2014).

Motivation Posture defines as a mental attitude (stance) that taxpayers willingly express in their
relationship with the tax authority. These postures describe the way in which tax payers
controlled the amount of social distance they placed between themselves and the tax office were
identified in earlier regulatory work. In Motivational posture the relationship that is exist
between the taxpayer and the tax authority varies according to the circumstances (Braithwaite,
2003). It is also an attitudes and beliefs that how individuals feel about and wish to position
themselves towards the tax authority. These postures adopted by taxpayer’s show how their
willingness to adhere to the tax rules, regulation and process of the authority signal and how
much they work with the tax authority. Therefore, Motivational posture is playing an important
role in the overall compliance level of the tax system (Tan and Braithwaite, 2017).

There are five motivational postures identified as important in the context of tax compliance like
commitment, capitulation, resistance, disengagement, and game playing. Commitment and
capitulation postures are reflecting an overall positive orientation and accommodating to the
authority than resistance, disengagement, and game playing. Resistance, disengagement, and

21
game playing Posture are described taxpayer defense-oriented mechanism or involved to fight
against the policies regulated by the tax authorities (Puspitasari & Meiranto, 2014).

Commitment postures believes, it is the right thing to do that taxpayers endorse the tax code and
accept personal responsibility to pay tax and also it involves internalizing of the code (Tan and
Braithwaite,2017). It reflects about the necessity of tax systems and a good will to pay one’s tax
and also feelings of moral obligation to act in the interest of the collective. (Puspitasari &
Meiranto, 2014).

The posture of capitulation recognizes the tax authority’s power and agreed to do what was being
asked. They are driven by willingness to please and a desire to avoid trouble without stopping to
think about ultimate goals (Tan and Braithwaite, 2017). It also reflects the feeling towards the
tax office is a kind power as long as one acts properly and defers to its authority and it
acceptance the tax office as the legitimate authority (Puspitasari & Meiranto, 2014).

In the other part resistance posture rejects regulatory authority that they perceive as being
oppressive, unhelpful and unforgiving. Taxpayers with the resistance see regulators as
untrustworthy and are likely to question about their competence. They fight for their right and to
curb tax office power because they doubt about the intentions of the tax office to behave
cooperatively and benignly towards those it dominates and provides the rhetoric for calling on
taxpayers to be watchful. (Puspitasari & Meiranto 2014).

Disengagement reflects a state of not caring, deliberately denying the regulators and they also
questions on satisfaction of believing that regulatory action matters. The authority rules and
norms are perceived as pointless and also not observed. taxpayers with disengaged posture not
only trust the authority but also, they will not defer to authority. In general, they are unwilling to
cooperate with the authority (Tan and Braithwaite, 2017). The tax office and the tax system are
beyond redemption for the disengaged citizen, the main objective being to keep both socially
distant and blocked from view (Puspitasari & Meiranto, 2014).

22
A posture of game playing involves dismissing, sidestepping and challenging authority.
Taxpayers who have the game playing posture are very fond of and tend to enjoy tax
minimization games with tax authorities. The name of the game played is called creative
compliance and little respect is shown for the spirit of the law (Tan and Braithwaite, 2017).
Game playing behaver is using every advantage and seeks the opportunities (loopholes) in order
to find the weakness of the regulation and the tax rule relates to the taxpayer’s point of view.
(Puspitasari & Meiranto, 2014).

These different postures are not mutually exclusive but they are relatively stable which means
holding one posture does not prevent or regulates from holding another. Change in circumstance
s make the postures vary in salience. This different posture is displayed according to the
circumstance whenever a taxpayer comes under attack; their posture of resistance is likely to
come to the fore, while capitulation and commitment will fade into the background. And also,
cooperation is displayed in the circumstance that postures of commitment or capitulation
dominate, but the postures of resistance, disengagement or game playing dominate, defiance
drives out more cooperative responses (Tan and Braithwaite, 2017).

Studies by Wahl, Kastlunger, &Kirchler, (2010) the motivational postures generally show
predictive of compliance outcomes but the Postures of commitment and capitulation are more
likely to be associated with compliance, while disengagement and resistance are linked with non-
compliance.

VI. Perception of Tax Payers on Government Spending

According to (Oladipupo & Obazee, 2016) not sharing full information in terms of governments
true expenditures and the cost of public services provided by the government has made citizens
have very limited knowledge .which according to the approach of Cuccia (2013), leads taxpayers
to perceive their relationship with the state not only as a relationship of coercion, but also as one
of exchange. Ndekwa (2013) argues in order to make taxpayers understand the connection
between tax revenue and expenditure that government should show some degree of
accountability.

23
There is high motivation on the taxpayer’s end to comply to the law if and when they notice that
the exchange between the paid tax and the services rendered by government are found to be
equitable. Taxpayers who pay high amount are more sensitive as to where the government
spends their money on. Voluntary compliance is likely to increase, if the government is
prudently spending the national revenue, for example, for basic facilities like education, health
and safety and public transportation. In contrast, if the government spending too much money on
unnecessary or unbeneficial to the public, then taxpayers will feel betrayed and attempt to evade
tax (Tadesse &Goitom, 2014).

In order to have a positive impact on public trust the tax administration must be a transparent,
accountable and service-oriented leader. If the tax collected form taxpayers are properly spent in
terms of the need and the budget which the taxpayers find necessary, compliance would be
increase (Geletaw, 2015).

However, the above discussion shows that these factors are also related to the behavior of tax
compliance and different researcher try to identify the real determinant. The prior studies about
the factors affecting tax compliance behavior of tax payers in the Ethiopian context have not
been consistent. Different studies have showed different results. Factors which were found to
have significant relationship with tax compliance behavior in some studies were found to be not
significant in other studies. Consequently, this study is set to get confirmation of which factors
significantly affect tax compliance behavior of Ethiopian tax payer. In doing so, this study has
drawn different factors along with the corresponding instruments from prior studies and set to
test their relationship with tax compliance behavior. The results were reviewed in the table below
in the appendix.

2.2.1. Summary of Empirical Studies in the Ethiopian Context

In order to examine determinants of tax compliance behavior of tax payers, past studies
conducted in the Ethiopian context over the past few years are summarized.

24
The results prior studies about the determinants of tax compliance behavior of tax payers in the
Ethiopian context have not been consistent. Different studies have showed different results.
Factors which were found to have significant relationship with tax compliance behavior in some
studies were found to be not significant in other studies. Consequently, this study is set to get
confirmation of which factors significantly affect tax compliance behavior of Ethiopian tax
payer. In doing so, this study has drawn different factors along with the corresponding
instruments from prior studies and set to test their relationship with tax compliance behavior.

2.3. Hypothesis of the Study

Based on the relationships between variables presented in the theoretical and empirical
evidences, it is possible to set an intellectual guess that perception on government spending,
motivational posture, detection and penalty, peer group behaviors, equity and fairness and tax
knowledge and education affect the tax compliance behavior in the Ethiopian tax payers case.
The following section forwards hypothesis for the relationship between tax compliance and
variables affecting it. Moreover, issues of how each hypothesis are evolved from background
theories are discussed.

2.3.1. Relationship of Tax compliance Behavior with Tax knowledge and Education
Tax knowledge is a level of awareness of tax legislation and other important tax-related
information. And it is also the level of sensitivity of the tax payer towards the tax system and tax
legislation. The formal general level of education received by taxpayers is an important factor
that contributes on the understanding of tax requirements particularly on registration and filling
requirements (Oladipupo & Obazee, 2016). Educated taxpayers may be aware of the
consequence of non-compliance and the available opportunities, and their better understanding of
the tax system and higher level of moral development potentially promote them a more favorable
taxpayer attitude and greater compliance (Tadesse & Goitom, 2014). Tax compliance needs
adequate tax knowledge and capability to use this knowledge in order to complete the tax returns
and associated tax documentation (Geletaw, 2015).

Hypothesis 1: Tax knowledge and education of tax payers have positive and significant effect on
tax compliance behaviors of tax payers.

25
2.3.2 Relationship of Tax compliance Behavior with Detection and Penalty
According to the economic and deterrence model, behavior of tax payers is influenced by the
benefit they get from tax evasion and the cost they pay due to penalties of fraud and probabilities
of detection. That means, the decision to have tax compliance behavior is determined by the
benefits and costs of non- compliance behavior. More probability of getting audited and higher
cost of penalty lead tax payers to have tax compliance behavior (Walsh, 2012).
Hypothesis 2: Detection and penalty of tax non-compliance behaviors have positive and
significant effects on tax compliance behavior of tax payers

2.3.3 Relationship of Tax compliance with Motivational Posture

The theory of reasoned action, a subset of social-psychology models, posits behavior of
individuals is determined by personal and social norms (Kerchar and Evans, 2009). Personal
norms are explained by what one should or shouldn’t do (OCED, 2010). Personal norms
influence taxpayer’s behavior in that their values, tax ethics, tax morality and tax mentality
influence attitudes towards tax.
Hypothesis 3: Motivational postures of tax payers have positive and significant effects on tax
compliance behavior of tax payers

2.3.4 Relationship of Tax compliance with peer group behavior

On the other hand, social norm as a pattern of behavior influences the behavior of individuals in
that individual’s behavior is dictated by the approval or disapproval of others (Alm, 1999). The
influence of others in influencing individual’s behavior can also be applied in tax compliance
behavior. The behavior of others to comply or not to comply to the tax requirements may
influence an individual to have tax compliance or non-compliance behavior. This argument leads
to the following hypothesis.
Hypothesis 4: Peer group behaviors related to tax payment have positive and significant effects
on tax compliance behaviors of tax payers

2.3.5 Relationship of Tax compliance Behavior with Tax Payers Perception on government
spending

26
According to the fiscal exchange theory, there is a psychological and relational contract between
the government and the tax payers (Fjeldstad, et al., 2012). Tax payers pay tax expecting goods
and services in exchange from the government. The way the government spends the tax collected
from tax payers may influence the tax compliance behavior of tax payers. That means the tax
compliance or non-compliance behavior is conditioned by the perception that the government is
providing the necessary services in return to the tax paid by tax payers. Consequently, this study
forwarded the following hypothesis:
Hypothesis 5: Perception of tax payers on government spending has positive and significant
effects on tax compliance behavior of tax payers

2.3.6 Relationship of Tax compliance Behavior with Equity and Fairness

The comparative treatment model bases its explanation of tax compliance with equity theory
(Ali, et al., 2013). According to equity theory, the motivation of a person to behave in some way
depends on the perception of equity or inequity feeling of that person. Equity or inequity feeling
is based on the comparative treatment one gets relative to others. Similarly, the comparative
treatment model in tax posits that the existence of perceived fairness of the tax system is a
function of how an individual tax payer is treated relative to others. It can be distributive (fair
distribution benefits and burdens), procedural (fairly applying the procedures to all tax payers)
and interactional (fair treatment of tax payers in their interaction as customer). The more an
individual perceives that the tax system is fair and equitable, the more he/she will have tax
compliance decision. This argument leads to the following hypothesis.
Hypothesis 6: Equity and fairness in the tax system of the country have positive and significant
effects on tax compliance behavior of tax payers

2.4. Conceptual Framework

Based on the arguments presented in the theoretical and empirical evidences discussed in the
preceding sections, the following conceptual framework is proposed. The conceptual model
depicts the relationship between tax compliance behavior (the dependent variable) and its
determinant factors (the independent variables).

27
Figure2.1.Conceptual Model of the Study

Tax knowledge
and education

Equity and fairness

Tax compliance behavior

Peer group
behavior

Detection and
penalty

Motivational
posture

Perception on
government
spending

Figure 2.1: Conceptual Framework

Source: Adopted from: Tehulu (2014)

28
 CHAPTER THREE: RESEARCH METHODOLOGY

3.1. Introduction
Researcher methodology describes the technical procedures that were followed to conduct the
study. In this part of the study the researcher wants to show the methodology were used while
investigating the study. Therefore; research approach, sources of data, sampling technique,
research design, description of the methods of data collection, and how the statistical be analyzed
has been specified.

3.2. Research Approach

The quantitative research approach is used so as to make use of statistical analysis by applying
systematic measurements and statistics. Research survey and data is collected and used while
conducting the study. Hence, this study adopted quantitative research approach.

3.3 Research design

This study is explanatory research in its design in which the cause and effect relationship
between tax compliance and determinant factors are to be tested. It is a cross-sectional
quantitative explanatory study in which data is collected using a survey research method. It used
both descriptive and inferential statistics in the addressing the issues at hand. In its descriptive
analysis this study assesses the background of tax payers, perceived level of tax compliance of
tax payers and their perceived position related to factors affecting tax-compliance behavior. In its
inferential analysis it investigates the cause and effect relationship between the dependent
variables (tax-compliance behavior) and independent variables (Determinant factors of tax
compliance behavior). Moreover, this study is a deductive approach in which the existing
theories and hypotheses are to be tested with a data obtained from tax payers through closed-
ended questions in a five-point Likert scale. This approach views human behavior as regular and
predictable so that the data collected from a sample can be used to predict behavior. Similarly,
the current study draws sample from the population to predict the tax compliance behavior of tax
payers through factors related to tax compliance.

29
3.4 Target population and sampling
3.4.1 Target population
The target populations of the study are category “B” taxpayers found in Bahir Dar town
administration. The number of tax payers that found in Bahir Dar town is 1006 (Bahir Dar town
administration revenue authority 2013).

3.4.2 Sample size

To determine the numbers of sample size that used to infer the general population, a number of
statisticians provide their view about how many samples are appropriate to represent the
population under study. Sample size is the basis for making efficient and reliable generalization
about the entire population (Kothari, 2004). To have the required sample size, a sample of 188
firms (with 5% response error) was selected by using simplified formula developed by (Yamane,
1967)

n=N/ (1+Ne2) Where, n = sample size

N = the size of the population

e = the error of 5 percentage points

n=1006/(1+1006(0.05)2) n = 286 is it 188 or 286?

Where level of significant is 95% In order to get sufficient and competent data, 286 taxpayers
were selected using simple random sampling to give chance for all tax payers.

3.5 source of data and collection method

According to Creswell (1994), primary data provides an easy means of assessing sample
information and enables the researcher to draw conclusion about generalizing the result from a
sample of responses to the entire population.

This study used questionnaires as an instrument to collect data from tax payers. Closed ended
questionnaire is appropriate for a quantitative approach in the current study to meet its objective.
This study uses a five-point Likert scale questionnaire to get data relevant to the purpose of the
study. This helps respondents to have ranges of response options to choose. Moreover, a five
point Likert scale is assumed to result in a response option which approximates the ordinal data
in the five-point scale to an interval data, which is appropriate to run a linear regression to test

30
the proposed hypotheses. This study uses standard questionnaire adopted from previous similar
studies but conducting reliability tests in the context of the current study.

3.6 Method of Data Analysis model specification

3.6.1 Descriptive analysis
The descriptive statistical data manipulated to present the result using table, frequency
distribution and percentage, to analyze the demographic characteristics of respondents. The
statistics of mean score and standard deviation will be employed to observe the distribution of
observations, degree of consistency and similarity among respondent responses with each
independent and dependent variable under the study (Zikmund, 2003).

3.6.2 Relationship Analysis

The Pearson correlation coefficient used to manipulate the relationship between the independent
variables of (knowledge and education, equity and fairness, peer group behavior, detection and
penalty, motivational posture and perception on government spending) and dependent variable of
tax compliance behavior of category ‘B’ tax payers found in Bahir Dar town administration

3.6.3 Multiple Regression Analysis

The result of regression analysis employed to test the finding whether it fulfills basic
assumptions. Multiple regression analysis also used to observe the effect of determinant factors
(knowledge and education, equity and fairness, peer group behavior, detection and penalty,
motivational posture and perception on government spending) and dependent variable of tax
compliance behavior of category ‘B’ tax payers found in Bahir Dar town administration.

3.6.4 Model Specification

This study uses multiple regression models in which the cause and effect relationship between
the tax compliance and its determinant factors is determined. In the regression analysis, both the
existence of significant relationship and the direction of relationship between these variables is to
be tested. In the decision to accept or not to accept the hypothesis a 95% confidence (rule of
thumb), the probability that the result of the study would be 95% same if repeated 100 times with
a 5% percent error. The direction and strength of relationship was also tested looking at beta

31
coefficients in the result. The current study used the SPSS as well as STATA as a tool to produce
the outputs from the row data. Based on the hypothesized relationship, the following regression
model is developed and variables relationships in the model are specified.

TCB = B0+x1KE+ x2EF+ x3PGB +x4DP +x5MP+ x6GS +e

Where,

TC… is tax compliance Behavior

B0… is a constant

X1, x2, x3, x4, x4, x5 and x6 are coefficients of the independent variables

KE… is Knowledge and education

EF… is Equity and Fairness

PGB… is Peer Group Behaviors

DP… is detection and penalty

MP… is motivational posture

GS… is Perception of Tax Payers on Government Spending e… is the error level

3.7 Validity and Reliability

Validity is often defined as the extent to which an instrument measures what it purports to
measure[ CITATION Cre09 \l 1033 ]. Validity means that our measuring instrument actually
measures the property it is supposed to measure. The objective of assessing validity is to see how
accurate is the relationship between the measure and the underlying trait it is trying to measure.
While reliability refers to the extent to which your data collection techniques or analysis
procedures will yield consistent findings. One way to think of this is that, other things being
constant, a person should provide the same answer on a questionnaire if it fills it at two different
periods of time. The most commonly used method of measuring scale of reliability is Cronbach’s
alpha α [ CITATION Fie09 \l 1033 ]. As [ CITATION Fie09 \l 1033 ] expressed that, a value of

32
nearby .70 is acceptable and a value of .80 and exceeding is a good worth. Some others writers
recommend that, a value of .60 and above are tolerable.

3.8 Measurements of Variables

Taxpayer Compliance Behavior- Taxpayer compliance behavior, threated as the dependent
variable in this study, is a multi-dimensional construct (Brown and Mazur, 2003). Most
commonly it is measured through three distinct types of compliance: payment compliance; filing
compliance; and reporting compliance. The three measurements are mutually exclusive and
provide a comprehensive measure of the overall taxpayer compliance (Brown and Mazur, 2003).
Accordingly, this study uses the three constructs that measure the tax compliance behavior of an
individual tax payer. These include: payment compliance; filing compliance; and reporting
compliance.

Different factors affecting tax compliance behavior have been identified in different studies
(Tadesse and Goitom, 2014; Geletaw, 2015; Redae and Sekhon, 2015; Niway &Wondwossen,
2015). Accordingly, different authors developed different measurements for each of these
factors. This study set six factors as determinants of tax compliance behavior of tax payers.

Knowledge and education - knowledge and education in the current study refers to the level of
awareness or sensitivity of the taxpayers to tax legislation. Measurements for knowledge and
education are drawn from Habtamu (2019) and Geletaw (2015). This factor is measured through
five elements like knowledge of how to announce income, how records are kept, the extent to
which they got education about tax related issues from the respected office, their perception
about the role of tax knowledge in improving their tax compliance and the involvement of the tax
authority in building their tax knowledge.

Equity and Fairness- Equity and fairness in tax refer to the extent to which the tax system treats
the tax payers in setting the amount of tax relative to their wealth or income. Measurements for
this factor, equity and fairness are also drawn from Habtamu (2019) and Geletaw (2015). It is
composed of four elements measuring tax payer’s perception towards the tax obligations, the tax
system, tax information provided by tax authorities and the tax rate relative to ability to pay. 31

33
Peer Group Behaviors- Peer group behaviors refer to the taxpayer’s associates such as relatives,
friends, co-workers and colleagues (Jackson & Milliron, 1986). It measures the influence of such
groups in shaping the tax compliance behavior of a tax payer. It is composed of three elements
(Geletaw, 2015) such as positive peer attitude, others‟ tax evasion practice, feeling of obligation
to pay tax regardless of others action.

Detection and Penalty- This factor measures the perception of tax payers about their possibility
to be detected by tax authorities and be penalized for non-compliance behaviors. It is composed
five elements (Habtamu, 2019; Geletaw, 2015; Akalu, 2016) including, chances of being audited,
fear of being caught and penalized, penalty rates and other tax enforcements.

Perception of Tax Payers on Government Spending- It is about the perception of tax payers as
to where and how the government spends the tax collected from tax payers. It is measured
through three measurement elements (Geletaw, 2015) such as how the government spends the
tax, benefit of the tax payers and the society from the tax, involvement of tax assessors in frauds.
Therefore, these items are adopted to be used in the current study as measurement instruments.
The detail measurement items are presented in the appendix.

In order to analyze the quantitative data collected using survey questionnaires, Statistical
Package for Social Sciences (SPSS) used to present and analyze the collected data from
respondents using related tables and graphs. The data collected from the field will be stored,
edited, coded and entered into the computer.

34
 CHAPTER FOUR: RESULTS AND DISCUSSION

This chapter contains the results and the analysis of the responses from the field. The data
analysis is in harmony with the specific objectives where patterns were investigated, interpreted
and inference drawn on them.
4.1. Demographic Information
4.1.1 Response Rate

Table 4.1 Response rate

Response Total Percent

Returned 280 98
Unreturned 6 2
Total 286 100
Source: SPSS Output and researcher’s computation 2021

The number of questionnaires, administered to all the respondents, was 286. A total of 280
questionnaires were properly filled and returned from category “B” taxpayers found in Bahir Dar
town.
This represented an overall successful response rate of 98%. According to Mugenda (2003), a
response rate of 80% or more is adequate. Creswell (2006) also asserted that return rate of 80%
are acceptable to analyze. Since the response rate in this study (98%) was greater than 80%, the
responses obtained can be used in the analysis and in making inferences about the target
population.

4.1.2. Sex of the Respondents

Table 4.2: Sex of the Respondents
Gender Frequency Percent Valid Percent Cumulative
Percent
Male 153 54.5 54.5 54.5
female 127 45.5 45.5 100.0
Total 280 100.0 100.0
Source: SPSS Output and researcher’s computation 2021
The respondents were asked to indicate their sex. Table 4.2 shows that majority (54.5%) of the
respondents was male and 45.5% were female. So we can say that most of the tax payers in
category “B” are males.

35
4.1.3 Age of the Respondents

Table 4.3: Age of respondents

Frequency Percent Valid Cumulative
Percent Percent
<25 28 10.0 10.0 10.0
V26-35 52 18.4 18.4 18.4
a36-45 108 38.6 38.6 67.0
l 46-55 67 23.9 23.9 90.9
i
above 56 25 9.1 9.1 100.0
d
Total 280 100.0 100.0

Source: SPSS Output and researcher’s computation 2021

The respondents were asked to indicate their age brackets. Result in table 4.3 revealed that
majority (38.6%) of the respondents was aged between 36 to 45 years and a minority of 9%
was aged above 56 years. The findings also imply that a significant number of the respondents
were youths hence young work force which can contribute massively to the country is category
‘B’ tax payer in Bahir Dar town.

4.1.4 Educational level of the Respondents.

Table 4.4: Respondent’s Educational Level

Frequenc Percent Valid Percent Cumulative Percent
y
High school 109 39 39 39.0
Diploma 84 30 30 100.0
Valid Degree 70 25 25
Masters and above 17 6 6
Total 280 100.0 100.0

Source: SPSS Output and researcher’s computation 2021

36
When respondents were asked to indicate educational level, Table 4.4 shows that the majority of
the respondents have educational level up to high school with 39% followed by diploma having
30% and 25% having degree the remaining 6% of the respondant have a second degree and
above educational level. Hence, it is possible to infer that the majority of category ‘B’ tax payers
in Bahir Dar town have a fair level of education to understand the wide range of services
rendered by the bank

4.2. Descriptive statistics for the study variables

In this section, the results from descriptive statistics are discussed. Table 4.6 below presents
descriptive statistics of the dependent and independent variables of the study. It reveals the mean
as well as the standard deviation of the variables used in the study. In addition, it indicates the
maximum and minimum values of each and every respective variable which essentially gives an
indication of how wide ranging each respective variable can be.

Table 4.5 Descriptive statistics

. summarize

Variable Obs Mean Std. Dev. Min Max

tc 280 3.282143 1.048485 2 5

ke 280 2.603571 1.315739 1 5
ef 280 2.875 1.081988 1 5
pgb 280 2.721429 1.388988 1 5
dp 280 3.021429 1.067391 1 5

mp 280 3.325 1.150697 1 5

gs 280 2.764286 1.325843 1 5
Source: STATA Output and researcher’s computation 2021

As we refer from the table 4.5 tax compliance behavior of the respondents has the mean score of
3.25 which is more than the average in five point Likert scale measurement which is 2.5, from
this it is possible to see that tax payers have more than average value in their tax compliance
behavior. That means, more than average tax payers comply with the tax system of the country.

37
On the other hand the above table revealed that the respondents expressed their perception on
knowledge and education variable with a mean of 2.6035 and std. dev of 1.3157. Further the
respondents indicated their opinion on equity & fairness variable with a mean of 2.875 and std dev
of 1.0819. Third the respondents have expressed their perception on peer group behavior with a
mean value of 2.7214 and std dev of 1.3889. Finally, the respondents indicated their opinion on
detection & penalty, motivational posture and perception on government spending with a mean
value of 3.0214, 3.325, 2.764 and a std dev of 1.067, 1.1506 and 1.3258 respectively.

4.3. Model Fitness Measurement

4.3.1 Examination of Data
After collecting the data through different techniques, the researcher has organized and prepared
the various data depending on the sources of information. Moreover, in order to ensure logical
competence and consistency of responses, data editing was carried out each day by the
researcher. Identified mistakes and data gaps were rectified as soon as possible.

This section presents the cleaning of data before it was analyzed. Two groups of problems are
discussed: the accuracy of the data input and missing observations. Outliers and the data were
tested for normality and consistency before implementing the multiple regressions in order to
ensure its validity for analysis.
4.3.2. Data Testing
The most critical assumptions related to classical linear regression model of data are tested in the
following sub-sections. Normality, multicollinearity, heteroscedasticity, outliers’ detection
model specification tests, and autocorrelation have been made to make the data available give
reliable result and make the model fit the data. These assumptions were required to be tested
because the estimation technique, Multivariate Ordinary Least Squares (OLS), has a number of
desirable properties. Hence, the hypothesis testing regarding the coefficient estimates could
validly be conducted.

4.3.3 Reliability Analysis

In a Likert-scale questionnaire measuring the consistency or reliability of the questionnaire is
essential. To measure such a reliability analysis Cronbach‘s Alpha (a) is the most common
measure of reliability scale. According to (Field, 2009) a reliability analysis value (α) of greater

38
 than 0.70 is very acceptable. Therefore, the responses generated from all variables in this study
were very acceptable (reliable) for data analysis.

Table 4.6 Reliability Coefficient

Scale Cronbach Number of Interpretation
Alpha items
Tax Compliance Behavior 0.922 5 very acceptable

Knowledge & Education 0.952 4 very acceptable

Equity & Fairness 0.917 4 very acceptable

Peer Group Behavior 0.971 4 very acceptable

Detection & Penalty 0.910 4 very acceptable

Motivational Posture 0.946 5 very acceptable

Government Spending 0.923 4 very acceptable

Source: SPSS Output and researcher’s computation 2021

Inter- item correlations were also examined to assess reliability of the study. According to Table
4.6 almost all of the variables in the study show more than 0.50. According to Gujarati (2007), if
the coefficient value lies between ± 0.50 and ± 1, then it is said to be a strong correlation. Hence
this indicates that sufficient and adequate correlations were among item responses (Hair,
Anderson, Tatham, & Black, 1998; De Vellis, 2003).

Table 4.7 Pearson Correlation

Tax Knowledge Equity & Peer Group Detection Motivational Governmen
compliance & Fairness Behavior & Penalty Posture t Spending
Behavior Education
Tax compliance 1
Behavior

Knowledge & .605** 1

Education

Equity & .612** .594** 1

Fairness
Peer Group .
Behavior .695** .447** .649** 1

Detection & .611** .510** .462** .548** 1

Penalty
Motivational .
Posture .544** 817** .618** .423** .426** 1
Government
0.5914** .607** .511* .741** .431 .548** 1
Spending

39
**. Correlation is significant at the 0.01 level (2-tailed).
Source: SPSS Output and researcher’s computation 2021

A correlation is a measure of how strongly two variables relate to each other. Correlation
coefficients are frequently used to describe data because they are relatively easy to use and
provide a great deal of information in just a single value (Mooi & Sarstedt, 2011).

Karl Pearson’s coefficient of correlation or simple correlation is the most widely used Method of
measuring the degree of relationship between two variables (Kotari, 2004).The calculated value
of the correlation coefficient ranges from -1 to 1, where -1 indicates a perfect negative relation
(the relationship is perfectly linear) and 1 indicates a perfectly positive relationship. A
correlation coefficient of 0 indicates that there is no correlation (Mooi & Sarstedt, 2011).

The above table shows the Pearson correlation result with its significant level. When we see the
correlation of knowledge & education with tax compliance behavior, it has a significant positive
Pearson correlation of 0.605 at 0.05 level of confidence interval. With regard to equity &
fairness, it has a significant positive Pearson correlation of 0.612 at 0.05 level of confidence
interval. The third variable which is peer group behavior has a significant Pearson correlation of
0.695 at 0.01 level of confidence interval. As far as detection & penalty is concerned, t has a
significant positive correlation of 0.611 with tax compliance behavior at 5 percent level. Last but
not least, motivational posture and government spending has a correlation coefficient of 0.544
and 0.591 respectively. This implies that equity & fairness and detection & penalty with a
correlation coefficient of .612 and .611 respectively with a significant p-value have a strong and
positive relationship with tax compliance behavior. Next, peer group behavior with a correlation
coefficient of .695 and significant p-value, has a strong relationship with tax compliance
behavior. Last, government spending with a correlation coefficient of .544 and a significant p-
value has the least relationship with tax compliance behavior as compared to the aforementioned
variables.

40
4.3.3.1. Test for average value of the error term is zero (E (ut)=0) assumption

The first assumption required is that the average value of the errors is zero. In fact, if a constant
term is included in the regression equation, this assumption can never be violated. Therefore,
since the constant term (i.e. α) is included in the regression equation, the average value of the
error term in this study is expected to be zero.
4.3.3.2 Test of Normality
Figure 4.1. Histogram showing normality of residuals.
.5

Testing
data
normality
.4

is done in
such a
way as to
determine
whether a
.3
Density

data is
well-
modeled
by a
.2

normal distribution or not, and to compute how probable an underlying random variable is to be
distributed normally. The smartest approach to evaluate how far the used data are from Gaussian
(normal) is to look at a graph and see if the distribution grossly deviates from a bell-shaped
normal distribution. Therefore, graphical (histogram and dot plot) and non-graphical (skewness/
.1

kurtosis and Shapiro-Wilk) tests of normality are used to test normality.

41
0

1 2 3
The histogram presented in figure 4.1 provides useful graphical representation of the data. The
bell-shaped black line on the histograms represents the "normal" curve. Notice how the data for
fitted values are normal. But also, it can be seen that there are few outliers which have
insignificant difference from the standard normal curve. Therefore, the residuals are normally
distributed and do not have potential problems on the specified model.

Table 4.8 Test of Normality

Source: STATA output results and researcher’s computation

As we can see above, the joint p-value is 0.09 which is greater than 5% significance level.
Hence, we cannot reject the null hypothesis that the riduals are normally distributed.

4.3.3.2 Assessment of Normality

In order to test the normality of data, Skewness and Kurtosis test of normality distribution were
used and conducted on Stata 14.2. The Skewness and Kurtosis tests are showing normality when
the result is within the range of +1 and -1 (Hair et al. 1998). The result of normality distribution
is presented below in Table 4.12. According to the table, the result of normality distribution test
shows that Skewness and Kurtosis were between the range of +1 and -1. Therefore, it indicates
that the data were normal and reliable for analysis.

Table 4.9 Assessment of Normality

Obs Skewness Kurtosis
Knowledge & Education 280 0.472 0.918
Equity & Fairness 280 0.409 0.798

Peer Group Behavior 280 0.409 0.798

Detection & Penalty 280 0.409 0.798

42
Motivational Posture 280 0.414 0.809

Government Spending 280 0.421 0.909

Source: SPSS Output and researcher’s computation 2021

The normality of the disturbance term is also required in estimating the parameters. If this is not
the case, all the tests that have been used so far will be invalid. The parameters to be estimated
must be the functions of a normally distributed variable (which is, most of the time, disturbance
term). Normal Probability Plot (NPP) and histogram of residuals used for the test of normality of
the disturbance term. A comparatively simple graphical device to study the shape of the
probability density function of a random variable is the normal probability plot which makes use
of normal probability plot, a special designed graph. If the variable is from the normal
population, the normal probability plot will be approximately a straight line (Gujarati, 2009).
Here is a VIF Test for the presence or absence of multicollinearity for each independent variable.

Table 4.10 Assessment of Normality

Source: STATA Output and researcher’s computation 2021

As we can see from the above table the VIF is less than the threshold which is 10. If you have a
VIF above 10, it is possible to conclude that there are multicollinearity issues. Hence, knowledge
and education equity and fairness, peer group behaviors, detection and penalty, motivational
posture and perception of tax payers on government spending are not collinear with each other.

43
4.3.3.3 Test of Heteroscedasticity
Heteroscedasticity is a systematic pattern in the errors where the variances of the errors are not
constant (Gujarati, 2004). Heteroscedasticity results in making estimators of ordinary least
square not efficient because the estimated variances and covariance of the coefficients (βi) are
biased and inconsistent and hence, the results of hypothesis testing are no longer valid. In this
study, the non-graphical methods of Cook Weisberg Test and White's Test of testing
Heteroscedasticity are used and the results obtained are presented in Tables 4.11

Table 4.11 Whites Test for Homoscedasticity

White's test for Ho: homoskedasticity
against Ha: unrestricted heteroskedasticity

chi2(4) = 7.87
Prob > chi2 = 0.0966

Cameron & Trivedi's decomposition of IM-test

Source chi2 df p

Heteroskedasticity 7.87 4 0.0966

Skewness 7.06 2 0.0293
Kurtosis 2.21 1 0.1374

Total 17.13 7 0.0166

Source: STATA output results and researcher’s computation

As we can see from table 4.11, the P-value is 0.096 which is greater than 0.05. Hence, we cannot
reject the null hypothesis of homoscedasticity in this research.

4.3.3.4. Outliers' Detection

Heteroscedasticity can also arise as a result of the presence of outliers (Gujarati, 2003). Outliers
are extreme values as compared to the rest of the data and are defined by the size of the residual

44
in an OLS regression where all of the observations are used. What is involved in outlier detection
is the determination whether the residual value (error = predicted - actual) is an extreme negative
or positive value. One or many residuals influence the OLS estimates. Plotting the residual
versus the fitted values can determine which errors are large, after running the regression. Here,
Graph 4.2 shows the plot of residual versus the fitted values in the study.
Figure 4.2: Dot Plot Showing residuals versus fitted values

Source: STATA output results and researcher’s computation

Looking at the plot, residual versus the fitted values graph, it can be concluded that there are no
significant outliers implying the residual values do not have extreme negative or positive value.

Also by predicting standardized residuals using STATA software, it can be seen whether the
outliers exist and influence the OLS estimates. As Robert (2006) indicated and recommended the
use of standardized residuals, if the standardized residuals have values in excess of 4.5 and -4.5,
they become outliers and affect the regression results. As seen in the STATA output, the
standardize outliers are calculated, listed and tabulated.

45
Therefore, there are no outliers in the study’s dataset which create heteroscedasticity problem to
the model.

4.3.3.5. Test of Model Specification

A typical specification error occurs when the estimated model does not include the correct set of
explanatory variables. This specification error takes two forms omitting one or more relevant
explanatory variables or including one or more irrelevant explanatory variables. Either form of
specification error results in problems with OLS estimates. Therefore, the model is tested
whether it is specified correctly or not, and then after, to estimate the regression model properly.
In this study, Ramsey RESET test is used to detect specification errors.

4.3.3.6. Ramsey RESET Test for Omitted Variables

RESET stands for Regression Specification Error Test and was proposed by Ramsey in 1969.
This test is made on the basis of null hypothesis that says “model has no omitted variables”.
Table 4.12.: RESET Test for Omitted Variables

Sour
ce: STATA output results and researcher's computation, 2021
As we can see in the above table, the p-value is not less than 0.5. Hence, it is impossible to reject
the null hypothesis and we can conclude that our model is fit; or there is no specification error in
the data. It is safe to say that there is no omitted specification in data

The RESET result, shown in Table 4.12, indicates us that it is impossible to reject the null
hypothesis that states the absence of omitted variables indicating no model specification error.

46
Though the regression result declares that there are no omitted variables in the model, omitted
variable bias is hard to detect. But there are obvious indications of this specification error. The
best way to detect the omitted variable specification bias is to rely on the theoretical arguments
behind the model which is based on the following questions. Which variables does the theory
suggest should be included? What are the expected signs of the coefficients? Are there omitted
variables that most other similar studies include in their model?

4.3.3.7. Test of Autocorrelation

Testing to see if autocorrelation problem exist is done using the Durban-Watson (DW) test.
(Gujarati, 2003).

Source: STATA output results and researcher's computation

As we can see the above test, the obtained DW-statistics (2.06) ends up in the zone of no
autocorrelation. Hence, it is possible to deduce that the data used in this study doesn’t indicate
the existence of autocorrelation in the variables.
4.4. Regression Analysis Model
Multiple regression analysis was used to predict the determinants of tax compliance behavior and
determine the magnitude and or direction of the relationship between the study variables.
In order for these hypotheses to be tested, three assumptions were considered.
First assumption: Coefficient of determination in the model summary should explain the
dependent variable above 70%.
Second assumption: At 5% level of significant and 95% confident level, the significant value (P
value) in the ANOVA and coefficient regression should be P < 0.000-0.05.
Third assumption: At 5% level of significant and 95% confident level, the value of predictions
or independent variables should be P ≤ 0.000 - 0.05

47
After analyzing dependent variables and independent variables on SPSS v.21, the mentioned
three assumptions were tested so as to know if the hypotheses hold or not.
First, variables were tested so as to check if coefficient of determination in the model summary
would explain the independent variables above 70%.
Regression Model
Table 4.13.: Regression result table
. reg tc ke ef pgb dp mp gs

Source SS df MS Number of obs = 280

F(6, 273) = 529.03
Model 282.420574 6 47.0700956 Prob > F = 0.0000
Residual 24.2901408 273 .088974875 R-squared = 0.9208
Adj R-squared = 0.9191
Total 306.710714 279 1.09932156 Root MSE = .29829

tc Coef. Std. Err. t P>|t| [95% Conf. Interval]

ke .3067692 .0461934 6.64 0.000 .2158287 .3977097

ef -.2951351 .0356998 -8.27 0.000 -.3654169 -.2248533
pgb .4166049 .0276449 15.07 0.000 .3621806 .4710291
dp .3258962 .0414124 7.87 0.000 .2443679 .4074246
mp .0798253 .0353087 2.26 0.025 .0103133 .1493373
gs -.0401695 .0383142 -1.05 0.295 -.1155984 .0352595
_cons 1.059149 .0695459 15.23 0.000 .9222345 1.196063

Source: STATA output results and researcher's computation

From the first assumption which holds in a model that if R value ≥ 0.7 then independent variables
(knowledge and education equity and fairness, peer group behaviors, detection and penalty,
motivational posture and perception of tax payers on government spending) explain tax compliance
behavior accounted for 92 % (R square =0.92), this shows there is a strong degree of determination by the
independent variables on the dependent variable.
On the other hand it is difficult to be confident that the model derived from our sample accurately
represents the entire population. However, there are ways one can assess how well the model can predict
the outcome in a different sample. One way to do this is through cross validation. Cross-validation is
assessing the accuracy of the model across different samples. Cross-validation is assed using the adjusted
R square from the regression analysis. The adjusted R square indicates the loss of predictive power or
shrinkage. It tells us how much variance in the tax compliance would be accounted for if the model had
been derived from the population from which the sample was taken. A result which is same or closer to
the value of R square indicates a good model to generalize. The results in the current study revealed R

48
square of 0.92 and the adjusted R square of 0.91 with a difference of around .001 (about 0.1%). This
shrinkage means that is the model were derived from the population rather than the sample it would
account for approximately 0.1% less variance in the outcome
4.5 Analysis of Variance
In order to establish the relationship between tax compliance behavior, knowledge and education
equity and fairness, peer group behaviors, detection and penalty, motivational posture and
perception of tax payers on government spending, 6 hypotheses were tested using ANOVA
(analysis of variance)

Table 4.14 Analysis of Variance

Tax compliance behavior

Sum of Squares Df Mean Square F Sig.

Between Groups 44.689 5 11.172 17.469 .000

Within Groups 53.083 364 .640
Total 97.773 369
Source: SPSS Output and researcher’s computation 2021

Hypotheses were tested at a significance level of 0.05. In practice, a significance level denoted

by α of .05 is conventionally used. This is the chosen probability value that forms the boundary

between rejecting and not rejecting the null hypothesis (Ogula, 1998). P value on the other hand

is the calculated probability which forms the basis of rejecting or accepting the hypothesis

(Dallal, 2012).

From the second assumption at 5% level of significant, the significant value (P value) in the

ANOVA and coefficient regression should be P ≤ 0.000-0.05. Therefore, From ANOVA table,

the second assumption is hold due to the fact that, significant value (P value) is 0.000.

Regression Coefficients

The regression coefficients associated with the determinants of tax compliance behavior are that

are presented above are discussed below

Tax Compliance Behavior (Y) = βo +β1KE+β2EF +β3PGB +β4 DP+β5 MP+ β6 GS+ έ

49
TC= 1.059 + 0.306KE-0.295EF+0.416PGB+0.325DP+0.079MP-0.40GS
(.069) (.046) (.035) (.027) (.041) (.035) (.038)
As Table 4.13 confirms, in the regression equation above the independent variables (knowledge

and education equity and fairness, peer group behaviors, detection and penalty, motivational

posture) have a significant impact on tax compliance at different levels of significance and with

different strengths as it shows a p-value of less than 5% which is significant. In the following

discussions both the significance levels and the direction of influence each variable have on the

dependent variable are discussed.

4.6. Discussion on findings

The following hypotheses test were conducted based on the regression results of the tax

compliance behavior obtained from the regression output.

I. Tax compliance and knowledge and education

The first hypothesis of this study assumed that there is a significant and positive relationship

between knowledge & education and tax compliance behavior. As shown in the regression table,

the beta coefficient of the variable (β = .306, t= .6.64, P=0.000) indicates that there exists a

positive relationship between knowledge & education and tax compliance behavior. Therefore,

the study fail to reject the null hypothesis that stated the two variables have significant

relationship. That means, the more tax payers are educated and have the knowledge related to

tax, the more they comply to tax and vice versa, assuming other things are constant. This result is

parallel with the previous empirical evidences. Past studies showed that level of formal general

education received by taxpayers is an important factor that contributes to the understanding of

tax requirements, especially regarding registration and filling requirements (Oladipupo &

Obazee, 2016). Educated taxpayers may be aware of non-compliance opportunities, but their

better understanding of the tax system potentially promotes a more favorable taxpayer attitude

50
(Tadesse & Goitom, 2014). The result in the current study may happened to exist because when

tax payers are educated and have the tax knowledge, they tend to be involved in better tax

compliance by filing a responsible citizen.

II. Tax compliance and equity and fairness

The results indicated a negative prediction to the dependent variable. A beta coefficient of the

assurance variable (β=-0.295 t= -8.27 p=0.000) indicated a negative contribution to the tax

compliance behavior. Hence the study rejects the null hypothesis which predicts the positive

relationship between the two variable but significant relation exists which means the more the

tax payers do not have a perception that the tax system is fair and equitable, the more the tax

payer will not have tax compliance behavior and vice versa, assuming other things are constant.

III. Tax compliance and pear group behavior

The value of beta coefficient for this construct is (β= .416, t= 15.07, P=0.000) accepting which

has a significant and positive relationship between peer group behavior and tax compliance

behavior. This study is supported by the findings of Puspitasari & Meiranto (2014) who stated

that peer groups, family members, other affiliates in business have a positive relationship

between tax compliance and also has significant impact on it. Therefore, we failed to detect the

alternative hypothesis that stated there is statistically significant relationship between the two

variables. Coefficient showed peer group influence affect tax compliance positively. That means,

the more the tax payers perceive that other tax payers have no tax compliance behavior, the

lesser they will have tax compliance behavior, assuming other things are constant. This is

because they develop a feeling that the tax system is not equitable and fair equally to all the tax

payers, favors some and disfavors others. On the other hand, the perception that other tax payers

have compliance behavior helps them to have tax compliance behavior.

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IV. Tax compliance and detection and penalty

The value of beta coefficient for this construct is (β= .079, t= 2.26, P=0.025), shows the
relationship of tax compliance with detection and penalty is positive and significant at 5%.
Therefore, the null hypothesis that stated there is statistically significant relationship between the
two variables is not rejected. The coefficient showed that detection and penalty affect tax
compliance positively. That means, the higher the possibility of detection by the tax authority for
non-compliance behavior and the subsequent serious penalty by the authority, the more the tax
payers will have tax compliance behavior and vice versa, assuming other things are constant.
This result is in line with the findings of Tan & Braithwaite, (2018) who reaffirmed that the fear
of being caught and punished due to tax evasion has a positive effect on the compliance behavior
of taxpayers

V. Tax compliance and motivational posture

The value of beta coefficient for this construct is (β= .079, t= 2.26, P=0.025), this indicates in
these study there is significant and positive relationship between motivational posture and tax
compliance behavior so that the study is failed to reject the null hypothesis. The coefficient
showed motivational posture affect tax compliance positively. That means, the more the tax
payer think that paying tax is their responsibility and moral obligation the higher the tax
compliance behavior they demonstrate and vice versa, assuming other things are constant This
finding of this study is confirmed by the findings of the study conducted by Tan and Braithwaite,
(2017) who reiterated that the motivational posture between taxpayer and tax authority has a
positive and significant effect on taxpayer compliance behavior
VI. Tax compliance and government spending

The value of beta coefficient for this construct is (β= -0.040, t= -1.05, P=0.295) based on this this

study rejects the null hypothesis which says there a significant and positive relationship between

perception of tax payers on government spending and tax compliance behavior. And also the

relationship between tax compliance and government spending is not significant This showed

government spending affects tax compliance behavior negatively. That means, the higher the tax

payer do not confidence on the way the government spends the tax they paid, the more they did

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not comply with the tax system. The thought that the tax collected from tax payers will be spent

not to the benefit the society or country to which they belong, tax compliance behavior will be

worse, assuming other things remains unchanged.

CHAPTER FIVE: CONCLUSIONS AND RECOMMENDATION

This chapter is structured in two sections. The first section deals with its major findings and
conclusions; and the second section presents some recommendations suggested as a solution to
problems that have been identified in the study.

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5.1 summaries of major findings
The study revealed that the observed taxpayers have a knowledge of how to keep records
announce income and expense. They are not satisfied with the tax system. The tax system is not
considered as fair or equitable. There are business operators not accommodated by the tax
system. Their neighbors, families and friends have good compliance behavior and also detection
and penalty is there when taxpayers miss their obligation in regard to tax which means the lax
authority has no sufficient man power and infrastructure to track noncompliant taxpayers and
collect taxes in due time. Lastly tax payers relation with the authority is good and fill free when
expressing their filling.

5.2 Conclusions
The main objective of this study was to examine the determinants of tax compliance behavior in
case of category “B” tax payers found in Amhara national regional state in Bahir Dar town to
recommend possible solutions for improvement. The study analyzed six potential determinants
of tax compliance. The findings of the study revealed that most of the identified determinants
have their own influence on the tax compliance behavior of category “B” tax payers found in the
town. Those elements of determinants identified in the research are knowledge and education,
equity and fairness, peer group behavior, detection and penalty, motivational posture and
government spending. Having this, the following conclusions are made about the determinants of
tax compliance based on the results of data analysis and interpretation shown in the previous
chapter. Standing from the answer the respondent’s knowledge & education is found to be
significant relationship with tax compliance behavior in a positive manner and they own it. It
helps them to decide to comply with the tax laws and regulations by paying tax timely and
accurately. Respondents have the opinion that the tax system is not fair and equitable. They have
claims on unregistered taxpayers who reduce fair competitions in the market.

The service received from government is not equivalent to the tax payment. As a result it
discourages one’s motivation for voluntary compliance. On the other respondents have got good
experience from family and friends in regard to tax compliance that is because they are well in
such way means they comply with tax laws and regulations by paying tax timely accurately.

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They also believe the tax authority has been in the position to detect the one that lacks it and
when it founds (disobeying tax payers) then tax payers will be penalized, this encourage them to
do so. Finally the study concludes tax payers fill free and responsible when they communicate
with the tax authority and when they pay tax as citizen.

5.3 Recommendations
A good tax system should meet five basic conditions: fairness, adequacy, simplicity,
transparency and administrative ease. In order to improve the tax compliance level, these five
basic conditions should be maximized. A fair tax system should provide better benefit to the
taxpayers in particular and the society in general in response to the tax paid by the people.

The study recommends the the effort should be made to improve taxpayers to have good tax
compliance behavior as first task to improve voluntary tax compliance and consequences
improve government revenue generation.
 Tax authority training to increase the knowledge and education level of taxpayers on
taxation that helps to create common and better understanding on the major points
like, the legal aspects of taxation, how to organize their financial statements (reports)
and how they can work hand in hand for their common goal.
 The tax authority should set equitable and faire tax system to increase the tax compliance
behavior of tax payers
 There should be an emphasis given to the other tax payer’s influence in the surrounding
since the compliance or non-compliance behavior of one tax payers influences the other.
 The authority should have an effective tax system that detects non-compliance behaviors
easily and reinforce complying behavior through proper penalty for non-compliance.
 The authority should develop an attitude that tax paying is the responsibility and moral
obligation of every citizen.

5.3 Future Area of Research

Further, it is recommend that this kind of study should be conducted at the national level
to gain a better understanding on compliance determinants in the country. Therefore, interested
researchers can extend the same topic by incorporating more variables for example:

55
institutional factors for example; the role of the tax authority; individual factors are;
enforcement; personal financial constraint, tax knowledge and probability of audit into the
model that are affect taxpayers’ voluntary compliance behavior.
The researcher suggests that further studies can be done with the same title by adding more
variables to the model which can affect tax compliance. A comparative study between taxpayers
could be made by incorporating all tax payers from different category such as category A
category B and category C taxpayers in the population. If time and resources are available,
further studies can also be made by taking regional and federal taxpayers together in the
population.

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APPENDIX

59
 BAHIR DAR UNIVERSITY
Accounting & Finance Master’s Program
College of Business & Economics
Questionnaire to be filled by Category “B” Taxpayers

Dear Respondent
This research questionnaire is formulated for partial fulfillment of Master’s Program in
Accounting & Finance. The research is regarding the determinants of tax compliance behavior
among taxpayers: the case of category ‘B’ taxpayers in Amhara national regional state Bahir Dar
town administration revenue authority. I would like to kindly request that you fill in my
questionnaire. The information you provide will help me to better understand the influence of the
determinants selected in this study on tax compliance behavior. Because you are the one who can
give me a correct picture of how you comply with tax rules and regulations at the town you are
residing in, you are kindly requested to respond to the questions frankly and honestly.

Your time and assistance would be greatly appreciated. Please note that the information
contained in this questionnaire will only be used for research purposes and your anonymity is
guaranteed.

Thank you very much for your time and cooperation. I greatly appreciate your help in furthering
this research endeavor.

Thank you in advance for your cooperation!

Instruction:
 No need of writing your Name
 For close ended questions put ’’√ ‘’ mark or circle on the box corresponding for your
choice.
Part 1 General information of Respondents
1. Gender
a)  Male b) Female

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2. Age
a) Less than 25 years 
b) 26-35 
c) 36-45 
d) 46-55 
e) Above 56 years old 
3. Educational levels
a) High School 
b) Diploma 
c) Degree 
d) Second degree and above 
e) Other specify---------
Part 2 Questions related to tax compliance determinants
Instructions: Please tick the number that you feel most appropriate, using the scale from 1 to 5
(Where 1 = strongly disagree, 2 = disagree, 3 = neither agree nor disagree, 4 = agree and 5 =
strongly agree).
Items/Statements
1. Tax Compliance Behavior 1 2 3 4 5
1. The business properly files its tax
2. The business properly reports its tax
3. The business pays its tax on time
4 Evading tax due to lack of ability to pay should not be
considered as crime/problem
5 Generally, tax evasion should not be considered as a crime
2. Knowledge & Education
1 I know how to determine my taxable income
2 I clearly know deductible and nondeductible expenses to
determine my taxable income
3 I know category “B” income tax rates
4 I can easily calculate my tax liability
5 I am certain about the period and where to pay my tax
liability.
6 I can easily get the necessary tax information & updates.
3. Equity & Fairness
1 Tax payers do not pay taxes on the principle of ability to pay
in Bahir Dar
2 Higher tax is imposed for higher business income
3 Tax system has lack of fairness in Bahir Dar Town
4 There is fairness of tax imposition in Bahir Dar town

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5 I believe that taxpayers should have a good Perception of
tax fairness.
6 On the whole, the burden of income taxes is fairly
distributed
4. Peer Group Behavior
1 Having friends, relatives and family in tax authority will
affect individuals’ taxpayers’ decision to comply or not.
2 Positive peer attitude i.e. a belief that my neighbors are
reporting and paying tax honestly encourages me to report
and pay the correct amount of taxes.
3 I believe that my neighbors are evading taxes and don’t
report the true fair picture of their tax liability.
4 Paying taxes are my obligation and I didn’t see any
reference groups from my neighbors
5. Detection and Penalty
1 The ability of the revenue authority to detect fraud makes
me comply with the tax system
2 The penalty imposed on perpetrators of tax induces me to
comply with the tax system.
3 Tax assessors make continuous audits as a result there is no
room to non-compliance
4 I will pay my tax obligations because of fear of being caught
and penalized.
6. Motivational posture
1 There are enough incentive mechanisms that induce me to
comply with the tax system
2 The government rewards taxpayers for complying with the
tax system
3 The development endeavors witnessed in Bahir Dar city
motivates me to comply with the tax system
4 I am afraid of the consequences of not complying with the
tax system
7. Government Spending
1 Collected tax is not well-spent as public service such
as infrastructure to the society makes you comply with tax
laws in Bahir Dar town
2 I think the government spends too much tax revenue on
unnecessary assistance welfare. This is especially true in
developing countries with is true in countries like Ethiopia.
3 The government spends a reasonable amount on social
welfare etc.
4 I believe the government utilizes a reasonable amount of tax
revenue to achieve social goals, such as infrastructure,
provision of benefits for lower income families for which I
am thankful.

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