Build Tax Morale
Enhancing VAT Compliance in the Retail Industry: The Role of Socio-Economic Determinants and Tax Knowledge Moderation
Abstract: Despite tax being a fundamental method to redistribute wealth and achieve a sustainable economic and social system, tax agencies and institutions in most countries are struggling with low tax collections. This issue is often attributed to the level of compliance among taxpayers. To gain more insight into this problem, a study was conducted to examine how socio-economic determinants such as probability of detection, tax complexity, tax penalty, tax sanctions, tax ethics, tax justice, government spending, and tax services quality impact VAT compliance decisions. The study drew a random sample of 770 retail industry participants from Jordan, an Arabic country, for a self-administered survey. Smart-PLS structural equation modeling was used to analyze and estimate the compliance model. The results indicated that all proposed direct relationships were supported, and the interactions between tax knowledge and the socio-economic determinants on VAT compliance were found to be significant. The findings of this research can be useful for policymakers and institutions responsible for taxpayers' communities to understand the role of tax knowledge in VAT compliance in the retail industry. The study emphasizes the significance of instilling tax knowledge, social and moral values among VAT payers, establishing an equitable system, and launching awareness programs in Jordanian society. Additionally, it contributes to existing literature by confirming a practical compliance model rooted in the socio-economic theory of regulatory compliance. This model incorporates the moderating effect of tax knowledge within socio-economic aspects of VAT compliance. By understanding the importance of tax knowledge, policymakers and institutions can develop effective strategies to boost VAT funds and improve compliance in the retail industry. This can ultimately lead to increased government revenues without placing an undue economic burden on lower-income taxpayers.
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Citation: Lutfi, Abdalwali, Ahmad Farhan Alshira’h, Malek Hamed Alshirah, et al. “Enhancing VAT Compliance in the Retail Industry: The Role of Socio-Economic Determinants and Tax Knowledge Moderation.” Journal of Open Innovation: Technology, Market, and Complexity 9, no. 3 (2023): 100098. https://doi.org/10.1016/j.joitmc.2023.100098.
The Redistributive Power of Cash Transfers vs VAT Exemptions: A Multi-Country Study
Abstract: Like high-income countries, low- and middle-income countries (LMICs) offer reduced rates and exemptions on particular goods and services in their value-added tax (VAT) systems. These policies are often motivated by distributional concerns and target items thought to take up a larger share of the budgets of poorer households. This paper explores the effectiveness of such policies in six LMICs. We estimate their impact on tax revenues, inequality and poverty, and compare these effects to existing cash transfer schemes and a hypothetical Universal Transfer (UT) funded by broadening the VAT base. To do so, we use tax-benefit microsimulation models incorporating input–output tables, allowing us to estimate the impact of exemptions on consumer prices due to VAT embedded in supply chains. We show that although preferential VAT rates reduce poverty, they are not well targeted towards poor households overall. Existing cash transfer schemes are better targeted but generally have limited coverage. A UT funded by a broader VAT base would create large net gains for the poorest households, reducing inequality and most measures of extreme poverty in each of the countries studied. Our results suggest that the widespread practice of providing special VAT treatment to certain goods and services is an expensive way of reaching poor households. In principle, expanding the VAT base and social protection schemes in tandem has the potential to both raise tax revenues and reduce poverty. Such reforms therefore warrant consideration for LMICs as they pursue Domestic Revenue Mobilisation and broader development objectives.
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Citation: Warwick, Ross, Tom Harris, David Phillips, et al. “The Redistributive Power of Cash Transfers vs VAT Exemptions: A Multi-Country Study.” World Development 151 (March 2022): 105742. https://doi.org/10.1016/j.worlddev.2021.105742.
Is the Value Added Tax Naturally Progressive?
Abstract: A broad based consumption tax, such as a value added tax, is generally considered to be a regressive tax. This conclusion, however, has not taken into account the fact that in developing countries the commodities on which poor households spend most of their income, even if they are included in the legal tax base, are administratively impractical to tax. This paper employs a rich data set on household incomes and expenditures for the Dominican Republic. The data set covers 2042 goods and services purchased by households of different income and consumption levels. It also contains information on the type of establishment from which the items were purchased. With this information, we estimate the effective rate of tax that has been paid on each item purchased by households. These estimations include the effect of the different rates of the tax compliance across households with different expenditure levels. The results of the study show that the burden of the current VAT in the Dominican Republic is progressive over all the quintiles of household expenditure. Furthermore, if the base of the VAT is made comprehensive, the estimated incidence of the burden of the VAT is still progressive over all the quintiles of household expenditure.
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Citation: Jenkins, Glenn P., Hatice Jenkins, and Chun-Yan Kuo. “Is the Value Added Tax Naturally Progressive?” Queen’s Economics Department Working Paper, No. 1059 (2006). https://hdl.handle.net/10419/189339.
Small Business Owners' Attitudes on VAT Compliance in the UK
Abstract: The aim of this study is to gain an understanding of the factors involved in value added tax (VAT) compliance. It draws on previously acquired social psychological knowledge in respect of income tax compliance. Three groups of business people were interviewed (10 restaurant proprietors, nine flooring/furnishing proprietors and eight builders who are registered for VAT purposes). The findings show that there are a number of similarities with income tax compliance, with factors such as equity and sanctions emerging. Of some importance would also seem to be the psychological phenomenon of mental accounting. Participants vary in the way they perceive the VAT monies collected. Some view it as belonging to the business (or themselves), whilst others perceive it as money belonging to H M Customs and Excise. It is possible that the different ways of mentally accounting for VAT money influence compliance.
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Citation: Adams, Caroline, and Paul Webley. “Small Business Owners’ Attitudes on VAT Compliance in the UK.” Journal of Economic Psychology 22, no. 2 (2001): 195–216. https://doi.org/10.1016/S0167-4870(01)00029-0.
Is a Value Added Tax Regressive? Annual Versus Lifetime Incidence Measures
Abstract: We measure the lifetime incidence of a value added tax (VAT) using data from the Panel Study of Income Dynamics (PSID) and the Consumer Expenditure Survey (CEX). Using annual income to measure economic well-being makes a VAT look quite regressive. Using two different measures of lifetime income, we find that a broad-based VAT would be only modestly regressive. Using current consumption as a proxy for lifetime income makes a VAT proportional. We discuss why these two approaches to measuring lifetime income lead to different incidence results. We also consider the distributional impact of zero rating food, housing, and medical expenditures.
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Citation: Caspersen, Erik, and Gilbert Metcalf. “Is a Value Added Tax Regressive? Annual Versus Lifetime Incidence Measures.” National Tax Journal 47, no. 4 (1994): 731–46. https://doi.org/10.1086/NTJ41789105.