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Understanding Tax Evasion Behavior in Tanzania
June 3, 2024  
Understanding Tax Evasion Behavior in Tanzania: Insights from Regression Analysis Introduction: Tax evasion poses a significant challenge to governments worldwide, undermining revenue collection efforts and hindering socioeconomic development. In Tanzania, like in many other countries, tax evasion persists despite governmental efforts to enhance compliance. Understanding the determinants of tax evasion behavior is crucial for devising […]

Understanding Tax Evasion Behavior in Tanzania: Insights from Regression Analysis

Introduction:

Tax evasion poses a significant challenge to governments worldwide, undermining revenue collection efforts and hindering socioeconomic development. In Tanzania, like in many other countries, tax evasion persists despite governmental efforts to enhance compliance. Understanding the determinants of tax evasion behavior is crucial for devising effective strategies to mitigate its prevalence and ensure a fair and equitable tax system.

This study aims to investigate the factors influencing tax evasion among Tanzanian taxpayers, with a focus on income level, perceptions of the tax system's fairness, beliefs in the effective use of tax revenue, and reasons for not paying taxes. By employing a regression analysis approach, this research seeks to unravel the complex interplay of these variables in shaping tax evasion behavior.

Results:

The regression analysis yielded insightful findings regarding the determinants of tax evasion behavior in Tanzania. Firstly, individuals with higher incomes per month exhibited slightly higher odds of engaging in tax evasion, indicating a nuanced relationship between income level and tax compliance.

Perceived fairness of the tax system emerged as a robust predictor of tax evasion behavior, with individuals who perceived the tax system as fair being significantly less likely to engage in tax evasion. This underscores the importance of fairness perceptions in fostering tax compliance among citizens.

Hence, belief in the effective use of tax revenue by the government was found to be negatively associated with tax evasion, highlighting the pivotal role of trust in government institutions and the perceived efficacy of public spending in shaping tax compliance behavior.

While reasons for not paying taxes showed a marginal effect on tax evasion, factors such as high tax rates, lack of knowledge on tax payment procedures, and distrust in the government were identified as potential drivers of non-compliance. These findings underscore the need for targeted interventions to address the underlying reasons for tax evasion and enhance taxpayer education and awareness.

Overall, the results shed light on the multifaceted nature of tax evasion behavior in Tanzania and provide valuable insights for policymakers seeking to strengthen tax compliance mechanisms and foster a culture of tax integrity among citizens.

 Regression Analysis:

Source SS df MS Number of obs =232
F(4, 227)= 60.32
Model 26.1516804 4 6.53792009 Prob > F= 0.0000
Residual 24.60263 227 .10838163 R-squared= 0.5153
Adj R-squared= 0.5067
Total 50.7543103 231 .219715629 Root MSE= .32921
  
Tax evasion Coef. Std. Err. tP>t [95% Conf.Interval]
   
Income level per month .0402991 .0187461 2.150.033 .0033604.0772378
Perceived fairness of the tax system -.2949056 .0193304 -15.260.000 -.3329957-.2568156
Belief in effective use of tax revenue -.0700492 .0329168 -2.130.034 -.1349108-.0051875
Reasons for not paying taxes -.0428999 .0220369 -1.950.053 -.086323.0005231
_cons 2.623102 .1168652 22.450.000 2.3928222.853381
   

Tax Evasion = β0 + 0.0402991*IncomeLevel + (-0.2949056)*Fairness + (-0.0700492)*EffectiveUse + (-0.0428999)*HighTaxRates + ε

Model Fit:

  • The model explains a significant portion of the variance in tax evasion behavior (R-squared = 0.5153). This indicates that the independent variables collectively contribute to understanding tax evasion.
  • The F-statistic tests the overall significance of the model, yielding a high value (F(4, 227) = 60.32) with a very low p-value (Prob > F = 0.0000), suggesting that the model is statistically significant.

Coefficients:

  • Income Level per Month: The coefficient (0.0402991) indicates that for every one-unit increase in income level per month, there is a 0.0402991 increase in the log odds of tax evasion. This coefficient is statistically significant (p = 0.033), suggesting that income level influences tax evasion behavior.
  • Perceived Fairness of the Tax System: The coefficient (-0.2949056) suggests that for every one-unit increase in perceived fairness of the tax system, there is a decrease of 0.2949056 in the log odds of tax evasion. This variable has a highly significant negative effect on tax evasion (p = 0.000).
  • Belief in Effective Use of Tax Revenue: With a coefficient of -0.0700492, for every one-unit increase in belief in the effective use of tax revenue, there is a decrease of 0.0700492 in the log odds of tax evasion. This variable is also statistically significant (p = 0.034).
  • Reasons for Not Paying Taxes: The coefficient (-0.0428999) indicates that for every one-unit increase in reasons for not paying taxes, there is a decrease of 0.0428999 in the log odds of tax evasion. Although this variable shows a negative effect on tax evasion, it is marginally significant (p = 0.053).
  • Intercept (_cons): The intercept (2.623102) represents the log odds of tax evasion when all independent variables are zero. It is statistically significant (p = 0.000).

Interpretation:

  • Individuals with higher incomes per month tend to have slightly higher odds of tax evasion.
  • Perceiving the tax system as fair and believing in the effective use of tax revenue are associated with lower odds of tax evasion.
  • Although reasons for not paying taxes seem to have a negative effect on tax evasion, the effect is not as strong as perceived fairness or belief in effective use of tax revenue.

Hence, the results shows that TRA should focus on enhancing the perceived fairness of the tax system and increasing public confidence in the effective use of tax revenue to discourage tax evasion.

The results from the regression analysis provide insights into the factors influencing tax evasion behavior among individuals in the study population:

Income Level per Month:

The coefficient suggests that individuals with higher incomes per month tend to have slightly higher odds of engaging in tax evasion. This could imply that as income increases, individuals might perceive themselves as having more to lose from paying taxes, leading to a greater likelihood of evasion.

Perceived Fairness of the Tax System:

The highly significant negative coefficient indicates that individuals who perceive the tax system as fair are less likely to engage in tax evasion. This suggests that perceptions of fairness play a crucial role in tax compliance behavior. When individuals believe that the tax system is fair, they are more inclined to fulfill their tax obligations.

Belief in Effective Use of Tax Revenue:

Similarly, the significant negative coefficient suggests that individuals who believe in the effective use of tax revenue by the government are less likely to evade taxes. This highlights the importance of trust in government institutions and the perceived effectiveness of public spending in shaping tax compliance behavior.

Reasons for Not Paying Taxes:

The coefficient for reasons for not paying taxes suggests a negative but marginally significant effect on tax evasion. This implies that individuals who cite various reasons for not paying taxes, such as high tax rates, lack of knowledge on how to pay, or distrust in the government, are somewhat less likely to engage in tax evasion.

Intercept (_cons):

The intercept represents the baseline log odds of tax evasion when all independent variables are zero. The statistically significant intercept suggests that even in the absence of the factors examined in the model, there is a baseline level of tax evasion behavior among individuals.

Implications:

  • Perceived fairness and belief in effective use of tax revenue are strong determinants of tax compliance behavior. Efforts to improve transparency, accountability, and communication regarding tax policies and government spending could enhance tax compliance.
  • While income level has a modest impact on tax evasion, policymakers should consider targeted measures to address tax compliance among higher-income individuals.
  • Understanding the reasons for not paying taxes, although marginally significant, can provide valuable insights for designing interventions to improve tax compliance.
Tax EvasionFreq.Percent
Yes7532.33
No15767.67
Total232100
   
Income level Per MonthFreq.Percent
Less than TZS 100,0005523.71
TZS 100,000 - 300,0006528.02
TZS 300,001 - 500,0007532.33
TZS 500,001 - 1,000,000187.76
More than TZS 1,000,000198.19
Total232100
   
Perceived Fairness Of The Tax SystemFreq.Percent
Very fair52.16
Fair15165.09
Neutral146.03
Unfair2410.34
Very unfair3816.38
Total232100
   
Belief in Effective Use Of Tax RevenueFreq.Percent
Strongly agree4720.26
Agree13959.91
Neutral4017.24
Disagree62.59
Total232100
   
Reasons for Not Paying TaxesFreq.Percent
High tax rates4318.53
Lack of knowledge on how to pay11750.43
Perception of unfair tax system4619.83
Lack of trust in government166.9
Financial constraints104.31
Total232100

Source: Field Research 2024

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