Analysis of procedural and Retributive Justice in Tax Compliance

Dr Deogratius N. Mahangila-University of Dar es salaam

Professor Kevin Holland- University of Cardiff

ORSEA Conference, Nairobi October 2014

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Contents

1. Introduction

2. Synthesis of literature review

3. Research objectives

4. Hypotheses

5. Methodology

6. Results

7. Conclusion

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1.Introduction

• Retributively justice is a theory of justice that considers punishment, if proportionate, to be the best response to crime

• Proportionality -level of punishment be scaled to severity of offending behaviour i.e. “Let the punishment fit the crime”

• A retributive justice system must punish severe crime more harshly than minor offence e.g. "life for life, eye for eye, tooth for tooth, hand for hand, foot for foot”

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1.Introduction

• Procedural justice refers to the idea of fairness in the processes that resolve disputes and allocate resources or transparency of processes through which decisions are made {consistence application of rules, unbiased decision making, clear appeal processes, participatory and ethical} (Leventhal, 1980; Stalans and Lind, 1997)

• Tax compliance –fulfilling taxpayers’ obligations (Kirchler, 2007).

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2. Synthesis of literature

• Theories of tax compliance– Tax penalties base on economic tax compliance theory

(fear of tax penalty and tax audit)

– But, taxpayers comply too because of perception of fairness (horizontal, vertical, fiscal exchange, retributive and procedural)

• However, many researchers have looked at roles of horizontal, vertical and fiscal exchange in TC

• Thus, this research concentrates on roles of retributive and procedural justice in TC

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3. Research objectives

1. To examine whether charging tax penalties which are perceived retributively justice is related to tax compliance.

2. To investigate whether implementing procedural justice in imposing the corporate income tax penalties is associated with compliance.

3. Examines whether procedural justice moderates the relationship between tax compliance and retributive justice.

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4. Hypotheses

• H1,a Perception of procedural justice of imposing tax penalties is positively related to tax compliance.

• H2,a There is a positive relationship between perception of retributive justice of tax penalties and tax compliance level

• H3,a Perception of procedural justice moderate the relationship between perception of retributive justice of tax penalties and tax compliance level

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5. Methods and participants

• Convenience sampling (257 SMEs-Dar)

• Constructs (Likert scale 5)from the literature:• retributive justice of corporate income tax penalties

for not keeping complete records (s.98 and S.100 (failure to pay tax on time) ITA, 2004 )

• procedural justice in the process of imposing tax penalties.

• Likely impacts of the penalties on tax compliance

• Control variables (age, gender, education, industry, length in business)

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5. Data analysis

• Data reductions-principle component analysis (23 items to 6 constructs)

• Procedural justice 1: transparent of appeals procedures and rights and procedure justice 2: actual implementation of those appeals procedures and rights (r=.000)

• Tax compliance 1: changing tax compliance behaviour and tax compliance 2: keeping tax compliant behaviour (r=.000)

• Retributive justice 1: adequacy of tax penalties and retributive justice 2 appropriateness (r=.000)

• R=.000 indicated discriminate validity of the constructs and α≥ 0.60 acceptable in exploratory study (Hair et al., 2010).

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5. Data analysis

• Multiple linear regression analysis using resulting regression scores

• Data were not heterogeneous with Breusch-Pagan / Cook- Weisberg test for heteroskedasticity chi2 (12), Prob> chi2=0.002

• Thus, robust option in StataSE12 was used (Stock and Watson, 2008)

• Classical and white robust standard error were almost similar suggesting model was not miss-specified

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5. Data analysis-model

• TCi = β1Length B + β2D_Male+ β3D_Trade+ β4D_Agri+ β5D_Mang+ β6D_Cons+ β7D_Age+ β8D_Pe+ β9Pro 1+ β10Ret 1+ β11Ret 2+ β12Pro 2+ β13Pro 1 * Ret 1 + β14Pro 1 * Ret 2 + β15Pro 2 * Ret 1 + β16Pro 2 * Ret 2 + εi

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6.Results Final Model-failure to pay to keep records-Tax compliance 1

Variable B SE B+ β Procedural justice 1 .40 .05 .40***

Retributive justice 1 .16 .06 .16**

Retributive justice 2 .28 .06 .28***

Procedural justice 2 .34 .06 .34***

Procedural justice 1 x Retributive justice 1

-.12 .06 -.12*

Procedural justice 1 x Retributive justice 2

.08 .05 .08

Procedural justice 2 x Retributive justice 1

.05 .05 .06

Procedural justice 2 x Retributive justice 2

-.13 .07 -.12

Constant 0 .05  

Adjusted R2   .15  19/04/23 12

Results-Simple slope analysis

• Slopes of the association at high (+1 SD above the mean), moderate (mean) and lower (+1 SD above the mean) level of the procedure justice 1 (Aiken and West, 1991; Rogosa, 1980).

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Simple slope analysis

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Results

• However, at low and moderate values of procedural justices 1 were significantly positive (b = .29, β = .28, p = .001) and b = .16, β= .16, p =.003) respectively.

• These results imply that when the perception of retributive justice 2 is high it might increase tax compliance levels for taxpayers who had low or moderate perception of procedural justice 1 inconsistent with hypothesis H3(i).

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7. Conclusions

1. The results denote that tax compliance level can increase with increase in perception of retributive justice and procedural justice of an imposing system.

2. Also, procedural justice may moderate relationship between retributive justice and tax compliance

3. It is recommended that tax authorities should strive to improve retributive justice perceptions of their tax penalties and procedural justice of systems involved in delivering tax penalties

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7. Conclusions

1. Limitation-small samples not randomly selected and association

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Thank you

FOR LISTENING

Questions??? and Suggestions

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2. Retributive Justice and Tax Compliance

• All taxpayers consider retributive justice – It is unfair to compliant taxpayers when noncompliant ones

are not punished (Hasseldine, 1998).

– Non-compliant taxpayers expect fair tax penalties (Wenzel, 2002).

• Nevertheless, a mild penalty but it may not deterrent yet severe but may be unfair (Verboon and Van Dijke, 2011).

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2. Retributive Justice and Tax Compliance

• Retributive justice occurs where there is an acceptable imposition of appropriate penalties on lawbreakers relative to their crimes with the aim of reinstatement of fairness, prevention, and to deter future offences (Wenzel and Thielmann, 2006; Wenzel et al., 2008)

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4. Hypotheses

• H1,a Perception of procedural justice of imposing tax penalties is positively related to tax compliance.

• H2,a There is a positive relationship between perception of retributive justice of tax penalties and tax compliance level.

• H3(i) when the perception of procedural justice is high, the perception of retributive justice will have positive relationship with tax compliance, yet (ii) negative relationship between the perception of retributive justice and tax compliance will exist when perception of procedural justices is low. 19/04/23 21

2. Retributive Justice and Tax Compliance

• Little research on retributive justice in tax compliance has centred on how severe tax non-compliance crime compared to other crimes (house breakers, corruption) (Vogel, 1974; Song and Yarbrough, 1978; Burton, Karlinsky, Blanthorne and Law, 2005; Evans and Kelley, 2001)

• Consistently, tax non-compliance minor offence

• No research has examined whether charging tax penalties which fit tax non-compliance crime committed is associated with tax compliance

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2. Procedural Justice and Tax Compliance

• Procedural justice in distributing revenues may increase tax compliance (Alm, Jackson and Mckee, 1993)

• Verboon and Van Dijke (2011) found that severe penalties increase compliance with law when the procedure of imposing them is fair (moderating)

• Yet no research shows how perception of procedural justice in imposing tax penalties relates to tax compliance

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