1 CHAPTER 1: INTRODUCTION 1.0 Chapter ... - DSpace@UM

noncompliance which means not reporting correctly or underreporting attitudes amongindividual taxpayers.Table 1.1: Issuance and Receipt of Individual Tax Returns in’ 000Year OfAssessment2004 2005 2006Types of Returns B BE B BE B BEIssued 1,309 2,179 1,381 2,293 1,380 2,105Received 1,100 1,722 1,078 1,692 1,000 1,639% 84.08 79.06 78.04 73.82 72.43 77.84Source: Jabatan Pengurusan Hasil, Lembaga Hasil Dalam Negeri, MalaysiaTable 1.2: Cases Audited and Additional Tax and Penalty in RM (Mil)AssessmentYearNo. ofCasesAdditional TaxCollectedAudit PenaltySource: Jabatan Pematuhan, Lembaga Hasil Dalam Negeri, MalaysiaTotal2004 3,022 73,130,206 40,874,004 114,004,2102005 4,901 123,134,230 70,078,296 193,212,5262006 4,314 110,632,997 64,667,325 175,300,322Tax literature reveals that any system of taxation would likely experience some evasiongiven the financial and other incentives not to comply. Leandra (2003) stated citizens findit hard to see the benefits they receive from the government because these benefits are soremoved or remote from the tax payment that they make. In addition, because most taxeshave a redistributive function, many citizens might receive less in benefits than what they4

for the wealthy in the western jurisdiction can also be found in Malaysiansetting and what is the influence on Tax Compliance behaviour?2) Do age, gender, educations level and employment status have impact ontax fairness and indirectly influence tax compliance?3) Following from research question 2 can there be any significant impact ontax compliance if demographic variables for age and gender arecontrolled?Research question 1 will be tested with H1. H1 stated in the alternative form.H1: There is a positive association between tax fairness and tax compliancebehaviour in MalaysiaH1 will test the dimensions identified by Gerbing (1988) and which were tested byChristensen et al (1994), Hite & Roberts (1992) and Richardson (2006) to find out thecorrelation with tax compliance in the Malaysian context.Researchers have given considerable attention to empirically test and state the existenceof an association between tax fairness and tax compliance e.g., Christensen et al. (1996)surveyed the different viewpoints of key participants in the tax system to compare theirindividual perceptions of tax fairness. Tax Fairness is a tax platform based on an idealthat aims to create a system of taxation that is fair, clear and equivalent for all taxpayers.Overall, tax fairness looks to limit the amount of tax legislation and rules that benefit onesegment of the tax-paying population over another. Many groups, politicians and9

individuals that push for tax fairness are to remove loopholes, incentives and cheatingwithin the tax system (http://www.investopedia.com/terms/t/tax_fairness.asp).Taxfairness supporters believe these practices place an undue tax burden on certain segmentsof the tax-paying population, while making it easy for other segments to significantlylower their tax burdens. Fairness is related to justice that means what is right and beingequal in opportunity and provision. As will be discussed in the literature review, thefollowing dimensions of tax fairness used in prior studies are used in this study.1) General Fairness and Distribution of the Tax Burden - refers to the generalfairness of the tax system and includes distribution of the tax burden. Thusindividual opinion of the sharing of the tax burden, is it fairly distributed?2) Exchange with the Government – refers to the benefits received in return for thetaxes paid to the government.3) Attitude Towards taxation of the Wealthy – refers to special deduction andprovision (specific tax rate) for the wealthy taxpayers.4) Preferred Tax Rate Structure – refers to the favoured tax rate structure whetherprogressive is preferred to flat or proportional tax rate structure.5) Self Interest – this refers to the amount of tax an individual personally pays is toohigh generally and in comparison with others.10

Following from H1, the other four hypotheses H2 through H5 were developed based onthese compliance literatures that predicted the influence of demographic factors on taxfairness as one important factor to taxpayers’ compliance behaviour which ultimatelyaffects taxpayers’ tax compliance behaviour.These four hypotheses stated in their alternative forms are as follows:H2: There is a positive association between older taxpayers and tax compliancebehaviour in Malaysia.H3: There is a positive association between female taxpayers and tax compliancebehaviour in Malaysia.H4: There is an association between education and taxpayers’ compliance behaviourin Malaysia.H5: There is an association between employment status and taxpayers’ compliancebehaviour in Malaysia.Demographic variables and tax compliance behaviour has been considered in theliterature (e.g. Jackson & Milliron, 1986; Hanno & Violette, 1996; Mason & Calvin,1978; Vogel, 1974; and Chan et al., 2000). Studies by Hanno & Violette (1996) foundthat younger taxpayers are more risk seeking and less compliant. Another demographicvariable that is equally important is gender which was found to have a narrow gap ofdifference (female vs male) in terms of tax compliance. Then impact of education andlastly the fourth variable employment status will be analyzed.11

Following from hypothesis H1 – H5, the regression models developed by Richardson(2006) will be used to test the 5 hypothesis. Only five dimensions like Roberts (1994) aretested in this study. The middle income earners tax share dimension was dropped becauseonly Richardson has experimented with it and is not dependable.(1) TCOMP i = α 0 + β 1 GENF i + β 2 TRATE i + + β 3 EXCH i + Β 4 SELF i + β 5 SPEC i+ E i(2) TCOMP i = α 0 + β 1 GENF i + β 2 TRATE i + β 3 EXCH i + Β 4 SELF i + β 5 SPEC iSource: Richardson (2006)+ βkXki + EiFirstly the abbreviations of the terms in the equations are as follows:TCOMP - Tax ComplianceGENF - General FairnessTRATE - Tax Rate /StructureEXCH - Exchange with the governmentSELF - Self InterestSPEC - Attitude towards taxes of the wealthy / Special provision for thewealthyXki - Include the demographic variables age, gender, education andOccupation statusEi - Residual termβCoefficient for XjRegression Model 1This model measures the direct association between the five tax fairness dimensionswith tax compliance.12

Regression Model 2This model measures the five tax fairness dimensions together with all the demographicvariables to see the influence of demographic factors on the perceptions of tax fairnessand ultimately towards tax compliance (Model 2). For further analysis, two of thedemographic variables will be controlled by using dummy variable to find out if there isdifference created by the dummy variables (regression Model 3a and 3b) for age andgender. The next paragraph writes about the scope of the study.1.5 Scope of the StudyThis study is only confined to examine taxpayers’ compliance behavior among individualtaxpayers’. Individual taxpayers’ will include those salaried working in either thegovernment or private sector and sole proprietor owned businessman (self employed).These are the taxpayers’ who receive form BE and B to submit their returns. Asmentioned earlier there are numerous determinants to tax noncompliance stated in the taxcompliance literature. However this study’s intention is to test the degree of influence taxfairness play in the taxpayer compliance behaviour. This is done by measuring theperceptions of taxpayers’ on tax fairness dimensions and their compliance behaviour.This valuation by taxpayers’ might be useful to the Inland Revenue Department (IRB)operational mechanisms and setting laws. The next part is on the limitations of this study.13

1.6 Limitations of the StudyThe findings in this study need to be interpreted within its limitations. First, the studyuses a convenient sample of registered taxpayers i.e. taxpayers from four IRB FederalTerritory Offices. Therefore the data may be biased because the non paying taxpayers’are not included in the survey. However, generally taxpayers’ who had adequatetaxpaying experience participated in the survey. Second, this study restricts itself toexamine only individual taxpayers’ perceptions, leaving out corporations and other formsof entities. Third, the sample should have covered at least one more geographic area;Selangor ( IRB offices at Petaling Jaya, Shah Alam, and Kelang) and the sample sizecould have been bigger for making generalizations on the findings. Fourth, 78% of thesubjects were employed (salaried) whereas the self employed or having own businesseswere a small portion only. One reason could be at the time of data collection it was thefiling period for employment income taxpayers (deadline 30/4/2008). Fifth, the tax lawsare not the same among countries and therefore it would not be advisable to benchmarkfindings of one country to another. Tax education among jurisdiction is not even.Taxation is an area which is sensitive to the subjects to reveal their true self about theirtax reporting behaviour because they might think it is a very private matter altogether.Lastly tax data are regarded highly confidential and reported information is also veryrestricted in establishing any conclusions. The last paragraph in this chapter is on theorganization of the study.14

1.7 Organization of the StudyChapter 1 - Introduction: This chapter will discuss why tax authorities press forcompliance among taxpayers and the crucial importance of taxation to the developmentof the country.Chapter 2 - Literature Review: This chapter will review literature on tax fairness andtax compliance. The focus will be on the impact of perceptions of fairness as acontributor to tax compliance.Chapter 3 – Methodology: This chapter will adopt the methodology used by theprevious researcher and apply it to for this study while looking at the literature.Chapter 4 – Research Results: This Chapter will discuss the findings for all the researchquestions that were initially thought of and put in as hypotheses in this study.Chapter 5 – Conclusions and Recommendations: This chapter will discuss theconclusion drawn from the findings of the study. Finally, implications of the study, futureresearch directions and some recommendations to IRB to achieve higher compliance andto attain greater level of efficiency in tax administration.15

CHAPTER 2: LITERATURE REVIEW2.0 Chapter OverviewThis chapter will take the reader through the literature on tax compliance, definition oftax fairness, impact of perceptions of tax fairness towards tax compliance, dimensions oftax fairness, and demographic factors and its impact on tax compliance. The discussionwill then try to relate the association between impacts of tax fairness as an independentvariable of tax compliance. The paragraph that follows will discuss on tax compliance.2.1 Tax ComplianceTax compliance means obeying tax laws. According to Singh (2003), the definition of taxcompliance is an action by a person filing his Income Tax Form (or usually referred asReturns), declaring all taxable income accurately, and disbursing the payable tax withinthe stipulated time without getting the tax authority to keep reminding or taking actionagainst those noncompliance taxpayers. Roth et al. (1989) stated that compliance withreporting requirements means the taxpayer files all required tax returns at the proper timeand that the returns accurately report tax liability in accordance with the Internal RevenueCode, regulations, and court decisions applicable at the time the return is filed.Noncompliance refers to not abiding the tax laws. The types of noncompliance; Firstly,the case of filing; the noncompliance refers to non filing of returns to the tax authority16

will lead to tax gap i.e. the amount of unpaid taxes due foregone. Second, the nonpayment compliance refers to untimely taxes paid, that means payment not made in atimely manner to the tax authority. Timely tax payment is important to the tax authority.The dues received now will be used for the government’s expenditure otherwise theinsufficient fund needs to be borrowed and incur additional cost. Thirdly, issue onnoncompliance and tax underreporting. This is considered a criminal offence thatimposes severe penalty. The taxpayer practices no reporting by way of evasion and alsoavoidance, both are same except that the later is legal while the former is illegal. Thisarea of noncompliance poses a serious problem to tax authority because these taxpayersescape tax and their burden is pushed to the other complying taxpayers. This is where thefair and equitable tax system is questionable.Andreoni et al. (1998) referred the magnitude of evasion being the tax gap which is thedifference between the federal income taxes households actually owe, and what theyreport and pay voluntarily on a timely basis but is mainly concerned with tax evasion asthe central part of the tax gap definition. As mentioned earlier taxpayer compliance is amulti-faceted measure. Brown & Mazur (2003) stated that theoretical definition oftaxpayer compliance consists of ‘three mutually exclusive and exhaustive measures’.payment compliance, filing compliance and reporting compliance. There are manypredictors for tax compliance from the economic to the non economic factors. Theeconomic factors are detection and punishment, harsh enforcement, burden of taxationwhereas the non economic factors as mentioned by Alm, Sanchez & Ana (1995) arebehavioural in nature. Fiscal psychological factor is an important element in tax17

compliance research and numerous tax compliance researches on tax fairness showedsignificant results. Generally the decision to comply or not is an individual’s rationalprofit seeking attitude (e.g. Allingham & Sandmo, 1972). A major difficulty in analyzingnoncompliance is in its methods of measurement.Braithwaite (2003) argues both taxpayers’ attitudes towards the tax system and their taxpaying behaviour together will have influence on the level of noncompliance. Thereforeboth have to be measured to understand overall levels of non compliant behaviour.Naturally individuals have incentives to conceal their cheating. This study which aims tosee the association between tax fairness and tax compliance uses the 14 noncomplianceitems developed by Yankelovich et al. (1984) which were used by Galligan & Richardson(2005) and Richardson (2006). Next discussion will look at deterrence and psychologytheory that relate to tax compliance.2.1.1 Deterrence TheoryThe taxonomy of tax compliance has been studied under theoretical perspectives ofdeterrence theory and fiscal psychology. Deterrence theory relates to sanctions, threats(fines and penalty structure). It has association with criminal justice. Tax noncomplianceis a soft type of “illegal” act of not complying with the tax laws. In fact evasion of taxwhich is an illegal act of evading tax and avoidance of tax refers to a legal concept of taxevasion and activities related to avoidance are tax planning and tax investment. Whatmade the deterrence theory that crucial? They were needed to deter the noncompliance18

activities of taxpayer who default to pay the government its rightful source of revenue.Taxpayers are profit seeking by gambling the benefits of evasion against the risk ofdetection and punishment.Researchers found a negative correlation using sanctions. However despite thisrelationship between fear of sanction and crime rate it can lead to a passive behaviour byindividual as reported by Cuccia (1994), Jackson & Milliron (1986), and Roth et al.(1989. Grasmick & Scott (1982) studied on the detection probability and the intentions toevade taxes and his findings were consistent with the deterrence theory.But literature that emerge later in late 80’s, psychology based variables were tested tounderstand tax compliance behavior e.g. role of moral obligation, perceptions of fairness,self interest and others. As stated by Torgler (2001), an increase in deterrence on honesttaxpayers will disrupt a balance. Taxpayers’ who paid fair dues but gets audited and laterfined, and even more disturbed when others who violated the law do not get punished.Therefore taxpayers’ cannot be treated harshly, because according to Murphy (2005) it isnot to punish but to repair the harm done and secure future compliance. Many taxresearchers have questioned the appropriateness of the deterrence theory framework(model) that is used to explain compliance behaviour because deterrence can also becounter productive. Thus, the study suggested attitudes towards the tax system inexplaining taxpayer noncompliance. Allingham & Sandmo (1972) investigated whetherhigh tax rate can or will enhance or decrease compliance. What can be deduced is thattaxpayer will only pay taxes because of fear of detection and punishment. Becker (1968)19

stated crime is an industry where market participants act to optimize their utility.Therefore, a crime will be committed if expected utility is greater than the utility thatcould be gathered if efforts were devoted elsewhere. Next paragraph will write on fiscalpsychology.2.1.2 Fiscal PsychologyAttitudes research on tax compliance was first introduced in 1959 by Schmolders.Thereafter attitude become a prevalent concept with the numerous studies which coversthe field of economics, accounting, criminal justice (decision sciences), law, psychology,sociology, ethics and taxation as discussed in the literature review in this study. This hasprovided plenty of issues and questions to understand attitude of taxpayers. Models usingthe attitudes tradition are more complex than deterrence theory models besides beingunique because it looks at compliance intentions of the taxpayer. However, according toCuccia (1992), fiscal psychology suffers from a methodological shortcoming because itfailed to identify the mechanisms through which the link exists and that economic basedcompliance research will be better at understanding taxpayer reporting. Factors underfiscal psychology which are behavioral in nature are demographic, (e.g. age, gender),perceptions of the moral of evasion, perceptions of peer compliance and fairness of thelaws. The taxpayer may not reveal the truth in the survey due to bias because one personmay perceive that underreporting is not wrong as compared to another.20

Previous research by Alm (1991) suggests equity models in understanding perceivedfairness. The most common point of difference in some research on tax compliancestudies used the concept of exchange equity, vertical equity, and horizontal equity (e.g.Kinsay & Grasmick, 1993). When public goods and services increase at a certain level oftax payment it boasts the taxpayer’s perception of exchange equity and therefore thechances of tax evasion would be less. Alm, Bahl, & Murray (1993) indicated thatmarginal tax benefits lowers the probability of income underreporting when 148 auditedtax returns of self employed were sampled.Alm, Jackson, & McKee 1992 and Andreoni et al. 1998 support that presence ofgovernment expenditure will motivate compliance. Similar results were reported byMcClelland, & Schulze (1992), and Becker, Buchner, & Sleeking (1987). Respondentsreported more than one income when they receive public goods than when they did notreceive. However, as more research support the result that when public goods increase,tax evasion reduces leading to better compliance, there was still doubt whether theinterdependence of taxpayer and government in providing public goods is due to theequity effect or economic effect or both are responsible. Roth et al. (1989) andYankelovich et al. (1984) found significant support for the relations between perceptionsof fairness and compliance, exchange equity and compliance, and also compliance andcommitment when tested for tax noncompliance using concepts such as taxunderreporting and dishonesty. Next paragraph will discuss tax fairness.21

2.2 Definition of Tax FairnessThe literature on tax compliance has suggested that equity theory, distributive justice andprocedural justice can give insights to examine tax fairness. Torgler (2001a) mentionedthat tax fairness is a very important factor influencing taxpayers’ compliance behaviourbecause it is related to tax burdens. In fact, Smith (1796) argued for any ‘good’ taxsystem tax fairness is crucial. McGowan (2000) stated that policy makers in the USbelieve that public perceptions can directly affect tax compliance behaviour.Spicer (1974), Song & Yarbrough (1978) found positive associations between unfairsystem and tax underreporting. Bordignon (1993) introduced fairness as an additionalmotivation to tax evasion or noncompliance. When there is lack of equity in an exchangerelationship it creates a sense of distress, with this anger it leads to a reaction which canrestore equity, which is tax evasion or tax noncompliance. Fairness is difficult to definebecause of the four inherent problems: (1) it is multidimensional, (2) it can be defined atthe individual level or for society at large, (3) fairness is intertwined with complexity and(4) a lack of fairness may be perceived justification or a cause of noncompliance(Christensen et al., 1994). According to Porcano (1984) referring back to the equitytheory which emphasis on horizontal and vertical equity, it is insufficient to bring out theconcept of fairness. Alternatively Porcano (1984) recommends distributive justice theoryto provide a stronger framework. In addition to equity, Leventhal (1976) and Deutsch(1975) have incorporated equality and need as an additional criteria for distributivetheory. Christensen et al., (1994) examined the influence of tax education on tax fairness22

dimension. The study revealed that these dimensions of tax fairness were related todistributive theory while Christensen & Weihrich (1996) researched tax fairness undersocial justice theory and role theory. Both studies identified the 5 dimensions as similarto Gerbing (1988) in their respective studies. Only laws and policy perceived as fair bythe public will enhance an effective tax system. Tax evasion and noncompliance is seenas a reaction to restore equity. To understand the motivation for tax evasion the study bySpicer & Becker (1980) on 57 university students showed evasion was highest when thestudents were told that their tax rate was higher than any average taxpayer and evasionwas lowest when told that their tax rate was the lowest among average taxpayers Taxevasion was dependent on tax rate, public expenditure and peer reporting.Another important aspect that taxpayers’ argue is the fair terms of trade between hispublic consumption and the government’s provision of public goods. If the goods andamount they receive is greater than their payment then compliance will increase whichmeans that individuals pay taxes to get benefits even though they know that chances ofdetention is slim. Murphy (2005) mentioned that theories based two models; thedeterrence model and the accommodative model to analyze the compliance behaviour oftaxpayers. The accommodative model is actually moral and obligations that can beconsidered when managing noncompliance. The study suggested that using both ofdeterrence, punishment and attitudes and moral obligations will help combatnoncompliance. Next paragraph is about tax fairness framed under the theories below.2.2.1 Distributive Justice23

Distribution in tax fairness refers to what individuals deserve and what they receive.Empirical research was mostly focused on the perceived justice and fairness. Finding thetaxpayers’ identity will give answers to the relevance of fairness direction. In manysurveys conducted in US it indicated that Americans believe that the tax system is unfairand wanted a tax reform. Taxation involves various types of distributive justice whereasmost studies only select very few and give them overall ratings. Basically there are threerules that affect a person’s deserved outcome: contributions rules, needs rule and equalityrule. To note, Spice & Becker (1968) and Porcano (1984) employed inequity whichincreased tax evasion and advantageous inequity reduced tax evasion. A tax system is aredistribution system, therefore, distributive framework is the best to analyze tax policyand measure the ‘fairness’ of the system. Porcano(1984) argued justice is amutltidimensional concept thus, it is appropriate to use distributive theory which usesseveral justice rules in determining one’ deservingness; Another thing is, that it is nolonger one’s personal or group treatment but the distribution of tax burdens across as awhole e.g., the fairness of progressive tax rate. Next, how procedural justice andlegitimacy are relevant towards tax fairness will be discussed.2.2.2 Procedural Justice And LegitimacyGalligan (2005) mentioned the pivotal role of legitimacy on tax compliance behaviour.Procedural justice will lead to legitimacy. Legitimacy in tax compliance behaviour isdefined as a belief/ trust by taxpayer on the tax authority. This belief that they are fairlytreated will want to obey the laws. Tyler (2004) has analyzed the cooperation the public24

gave the police was because of the legitimacy the public had on the police. Murphy(2005) states every year significant middles income taxpayers’ use aggressive taxplanning to either legally or illegally conceal their actual income. These illegal taxesplanning behaviour cannot be settled just by using force or threatening strategies, becausein the long run the legitimacy of tax authorities will be undermined. People are lessinclined to accept an unfavourable outcome and are likely to challenge the situation whenthey believe that the procedures are unfair. Therefore the authority has to play a fair rolethat will increase the perception of legitimacy and can create cooperation and get thepublic to obey tax laws. Two aspects; attitudes and behavioral can be measured to assessthe noncompliance behaviour of taxpayer. This present study measures the dependentvariable which is tax compliance by asking questions related to behaviour of underreporting and on taxpayers evasion intentions. The conclusion drawn is that the more thetaxpayer has good view about the legitimacy the more they will be tax complaint.Gilligan & Richardson (2005) conducted an exploratory cross cultural study in Australiaand Hong Kong to evaluate how important is perceptions of tax fairness and its influenceon tax compliant behaviour. According to Gilligan & Richardson (2005) morallegitimacy refers to norms that emphasis on motions of consequences, procedures,structures and personality; cognitive legitimacy which emphasis on making decisions andpredicting how, why and where these rules and practices are situated on this field oflegitimacy. Public’s voluntary compliance can be ensured when the tax system isequitable. The concept of legitimacy is found to be the key driver in their decisionmaking process that leads to tax compliance. Then, one needs to think legitimacy as a25

elief, and evaluation between pragmatic legitimacy and moral legitimacy. Pragmaticlegitimacy refers to norms which are self interested calculations which bring in motionsand exchange and values.2.2.3 Equity Theory/Justice TheoryAccording to Porcano (1984), traditionally equity theory indicates two types of equitywithin a tax system: (1) horizontal equity and (2) vertical equity. Horizontal equity refersto providing equal treatment to all in the same group whereas vertical equity refers togiving a suitable differentiation among unequal persons in that group. That means thosewho are rich, should be treated as able to pay higher than lower groups of income earners.The implementation of the tax systems are based on either progressive tax structure orflat tax rate structure. But most of the individual taxes are progressive tax structures.However, the progressive tax rate which is vertical in terms of providing equity does notmeet the expected equity. Therefore Spicer & Becker (1980) found that taxpayers adjusttheir perceived inequalities through tax evasion. However, before looking at the link orassociation between tax fairness and tax compliance knowing the attitudes of taxpayers’is quite important. The taxpayer behaves to comply or not to comply based on theattitudes he has framed against the tax system. The attitudes towards tax compliance aredirectly linked, so the next discussion will be on perceptions and attitudes of taxpayertowards tax systems.2.3 Impact of Perceptions of Tax Fairness towards Tax Compliant Behaviour26

Generally, attitudes of taxpayers’ towards the fairness of a tax system affect compliance.According to Song & Yarbrough, 1978) evasion in small amount is not considered aserious crime or morally wrong. Research on equity based theory showed less conclusiveresults between taxpayers’ positive attitudes of the tax system and compliance, accordingto Chan, et al. (2000).Christensen et al. (1994) reported with the increase in taxknowledge on maters of complexity of the tax system, it allow taxpayers’ to takeadvantage of the complexity of the system, and then they don’t equate it to an unfair taxsystem. In fact, with the increased tax knowledge finally, they find the tax system lessunfair (level of unfair is low thus moving to fair).The general consensus is that usuallywhen one has developed a frame regarding a specific term or concept then the pattern ofbehavior and decision making will very much follow according to the mindset. Thatmeans when a concept like tax fairness has been perceived in such a way, it willdefinitely influence the decision making process. Therefore, exposure to tax education,change their perceptions towards certain aspects of tax fairness and enhance compliance.Mason & Calvin (1984) stated perceptions of the tax system have a bearing on publicconfidence in the tax system which increases tax evasion. However, the dissatisfied buthonest taxpayers and the other dissatisfied but dishonest cited deterrence activities,sanction threats and punishments, fear of being caught and possible disclosure of theirdeviance acts to the public that strongly made then to remain compliant. The commonbeliefs by tax administrators and the general public are that dissatisfaction with the taxsystem is responsible for increased tax evasion. However, Mason & Calvin (1984) alsorevealed that high taxes are actually the cause for tax evasion. But it will tie back to the27

elief that unfairness in the tax system (taxes too high) has caused tax fraud (tax evasionor tax noncompliance) The study by Mason which compared the types of tax evasion in1975 and 1980 highlighted that perceived fairness lost ground during this time framewhereby the percentage of taxpayers’ who said that the system was fair dropped from 71to 56.But eventually those who are dissatisfied but honest agreed too high taxes arereasons for cheating and they say that the tax system is unfair.According to Schisler (1995), equity or fairness is positively related in some way to taxcompliance. Jackson & Milliron (1986) concluded tax fairness refers to two importantdimensions; equity of trade and equity of taxpayers’ burden. Equity of trade refers towhat is received in exchange for the dollars paid towards one’s tax liability and equity oftaxpayers’ burden refers to the equity of distribution of the tax burden whether is itdistributed fairly and evenly with the taxpayers within the same group or is it betweengroups. Distribution of the tax burden within the group refers to horizontal equity i.e.people in the same group sharing the liability equally and distribution between groupsthat refers to sharing the burden with different people in different groups, thus, is therefair distribution of the tax burden and commitment towards one’s obligation to contributeto tax to generate revenue for the country. In testing the existence of the associationbetween tax fairness and tax compliance, Roberts (1994) used a 30 second televisionpublic service advertisement to measure if there was any impact caused by these 30second advertisement on taxpayers’ perception of fairness which was predicted toultimately influence their tax compliant behaviour. The results proved to be significant inboth the testing; confirming that the advertisements had contributed to the influence on28

the perceptions of tax fairness and when tax noncompliance was the dependent variableagain it was significant (fairly high levels of compliance).Falkinger (1995) stated that the amount of tax that a person evades decreases withperceived equity if only the person’s absolute risk aversion increases with perceivedequity. Exchange equity refers to the perceived value of tax funded government benefitsand services in exchange for one’s tax contribution. Vertical equity is about the burden oftaxes for certain social groups compared to others. Prior studies have tested empiricallythe dimensions of tax fairness concept (e.g. Richardson (2006), Gerbing (1988),Christensen et al. (1994), Christensen & Weihrich (1996). Gerbing (1988) found eightfactors; general fairness/distribution, exchange with government, self interest,government spending, attitude towards taxes of the wealthy, progressive versus flat taxrate, complexity and justification of evasion. However, only five factors were identifiedto be dimensions of tax fairness namely general fairness/ distribution, exchange withgovernment, tax rate structure and the taxation of the wealthy. However, Wenzel (2002)discussed in Chapter 3 of his article that tax compliance often refers to issues of justiceand fairness in a selected manner. Further, researchers have found it very challenging tobe able to demonstrate the importance of these variables to tax compliance.Wenzel (2002) found that this model of approach is criticized because it is one sided i.e.ignoring the fact that voluntary tax compliance requires some cooperation between thekey participants i.e. the taxpayers and the tax authority. But again the cooperation isdampen when tax authority are heavy handed with regulatory approach. Therefore, the29

elevance of knowing the attitudes of the taxpayers’ helps to inform why they react thatway and to understand what importance tax equity or fairness has in their actions towardstax compliance. Their behaviour can be classified as; the rational actor and the profitseeking taxpayer. The next two paragraphs will explain more about it.2.3.1 The taxpayer is the rational actorAchieving tax compliance from the public is a challenge to almost every tax authority.Early research concentrated on model that made taxpayer behave like actors who willdecide their action based benefit they can get from their actions, according to Allingham& Sandmo (1972). Several research findings show that taxpayer will not comply if thesystems persists to be unfair, unjust and illegitimate ( e.g. Alm, Jackson & McKee,1993;Cowell,1992; Roberts & Hite,1994; and Taylor 2001), reports understanding taxpayers’attitudes will give IRS (US) a better position to design strategies to achieve greatercompliance.Researchers have suggested interesting concepts and findings to tax compliance andoffered theories. Valerie Braithwaite (2003b) highlighted a position of resistance ofprotest as a motivation postures that one has against the tax system. These resistancesencourage evasion and avoidance. But on the other hand taxpayers are of the view thatthey are bound by the rules of the tax authority which tries to collect as much as tax as itcould while the taxpayer try to get away with paying little tax as they could. However, astudy by Wenzel (2002) added to the tax compliance framework a social identity for30

justice motivation. The law can be perceived as wrong and the type of behaviour thatfollows cannot be blamed because the interpretation of the law and obeying the law forone may not be the same for another if the other perceive the system to be unfair so hewill evade tax or become a non complaint taxpayer, he will underreport, over-claimdeduction, not file in his returns and delay payments.2.3.2 Maximize Gain/Profit SeekingThe economic self- interest theory by Allingham & Sandmo (1972) only consider theindividual outcome i.e. the taxpayer compromise to pay certain amount of tax and hopethe detection action will cover the benefit that he already gain through the evasion. Themost important point to think is how much the taxpayer evaluates the tax system inrespect of self interest favourable to him. If they find the tax system favourable to themthan they will be tax complaint i.e. they are looking for justice and fairness in the system.As mentioned by Murphy (2005), research conducted in many different contexts hasshown that people are able to accept unfavourable outcomes provided they feel theprocedures used to come to those decisions have been handled in a procedurally fairmanner. After understanding tax compliance, definition of tax fairness, the suggestedunderpinning theories establishing the link between tax fairness and tax compliance thenext important aspect would be to know the unique characteristics of tax fairnessdimensions which are the variables in this study.2.4 Dimensions of Tax Fairness31

It has been admitted by many researchers (e.g. Porcano, 1984; Richardson & Sawyer,2001; and Jackson & Milliron, 1986) that tax fairness is a multidimensional conceptwhich was also stated as the reason why it produces inconsistent results. Howeverresearchers have added it as an independent variable to see the correlation with taxcompliance behaviour.. Tax Fairness was studied by Gerbing (1988) in her surveyquestionnaire “an empirical study of taxpayer perceptions of fairness” developed anoperational survey instrument to measure taxpayer perceptions of tax fairness in Texas,US. The study was carried out with 56 items and identified eight factors throughConfirmatory Factor Analysis (CFA): (i) general fairness/distribution,(ii) exchange withthe government, (iii) self interest, (iv)government spending (v) attitude towards taxes ofthe wealthy,(vi) progressive versus flat tax rates,(vii) complexity, and (viii) justificationof evasion. However, only five could be considered as fairness dimensions: (i) generalfairness/distribution, (ii) exchange with government, (iii) attitude towards taxes of thewealthy, (iv) progressive versus flat tax rate and (v) self interest. The study also supportsthat tax fairness is a multidimensional concept. The next immediate paragraph willdiscuss the literature on each of the dimensions.Christensen et al. (1994) refined and modified survey instrument of Gerbing (1988) withthe five dimensions and administered it to 296 students studying tax introductory course.The results showed that these dimension were able to measure tax fairness but not allwere significant. Factor analysis findings showed the students had better perceptions oftax fairness after being exposed to tax knowledge. Gerbings’ fairness dimension weretested by Christensen et al. (1996) on different role players in the tax systems which32

include tax auditors, tax educators and tax practitioners who were different in theirperceptions towards tax fairness but the dimension were tested using factor analysis andwere able to conclude that different perceptions can improve information gathering fromthe taxpayer and the tax authority should take this into considerations.Richardson (2006) studied tax fairness as one of the various independent variables in aninternational cross country investigation. The study showed non economic determinantssuch as income source, agricultural income, democracy, culture, fairness, religion, legalsystem, regional developing country, income level (separated into low income level andhigh income level) and tax rate showed strongest effect on tax evasion.Hite & Roberts (1992) tested the association between tax reforms and public perceptionsof tax fairness ultimately testing to see the compliant behaviour of the residents of theUS. However their reports showed that the tax reforms did not improve their perceptionsof fairness or the simplification of the tax system. In another study by Gilligan &Richardson (2005), Gerbing’s fairness dimensions were tested as a comparative studybetween two jurisdictions i.e. Australia and Hong Kong. Five dimensions of tax fairnesswere found but the overall conclusion was, there are no universal perceptions of taxfairness prevailing cross culturally.Finally Richardson (2006) tested Gerbing’s (1988) dimensions once more in isolation onHong Kong taxpayers and found able to include one more dimensions i.e. middle incomeearners share/burden of tax as the sixth dimension and used regression to understandtaxpayers perceptions of tax fairness, however not all the dimensions he factored showed33

significant results. The reasons given for the results were culture and also the studyseparated the questions on share of burden to cover three categories of taxpayer groupsnamely; low income earners, middle income earners and high income earners. Next, eachof the tax fairness dimensions will be discussed in the following paragraphs.2.4.1 Dimension 1- General Fairness and Distribution of the Tax burdenWenzel (2002) who investigated the need to identity taxpayer’s role is as a person whoseeks justice for all when in a situation like deciding on tax fairness. The role of thetaxpayer cannot be looked as an individual’s outcome because the taxpayer is looking atjustice to decide is the tax system fair to all. The point to reach is that if the taxpayerperceives the tax system not fair, illegitimate then difficult to achieve compliance or inother words evasion increases. According to Schisler (1995), taxpayers’ perception onequity was lower than tax preparers. He gave three reasons aggressiveness, equityperception and consensus will decide the compliance behaviour and his findings revealthat taxpayers are aggressive in their tax situations.The general conclusion is that taxpayer felt the system less equitable and they will find away to evade or escape taxes. To evaluate the feeling of fairness by taxpayers’ the meanvalues of the five questions asking opinion on general fairness of the income system andthen the average tax payers’ judgment shows the score is past average i.e. reflects a morefair tax system in Malaysia. Studies using distributive justice gave mixed findingsbecause most of the studies select and pick one aspect of these distributive justices andevaluate. Fairness refers to one’s tax burden whereby one person’s tax burden compared34

with similar another person or people (horizontal equity) or else it is tax burden of agroup compared with that of another group or others (vertical equity) (Wenzel 2002). Ifthe tax burden is not distributed evenly due to the different categories of people thenfairness is questionable. It is to be noted that disadvantageous inequity increase evasionand advantageous in equity decreases evasion, as mentioned by Spicer & Becker (1980).Furthermore, the distribution of tax burden among all in the society is at large, referred asmacro justice, that measures whether taxes are paid evenly by all society groups as statedby Brickman, Folger, Goode & Schul (1981) as quoted in Wenzel (2002).2.4.2 Dimension 2 – Exchange with the GovernmentAs stated by Roberts (1994) that taxation is actually similar to trading with thegovernment. Therefore in return for the tax payment what quality and kind of publicservices do they get? To understand the relationship between taxpayer and thegovernment research is focused on the perceived tax fairness and the compliantbehaviour. The degree of satisfaction the public has with the government will enhance taxcompliant behaviour. Positive actions by the state are expected to bring about positiveattitudes and commitment of taxpayers’ to the tax system and ultimately tax compliance,as mentioned by Torgler (2001a).Porcano (1992) analyzed the relationship between the criteria used to evaluate a taxsystem and the perception of fairness about the tax provisions. He compared between twogroups i.e. tax preparers and taxpayers and found that taxpayers perceive the system to be35

unfair and also their exchange with the government not fair. However the tax preparerwho is acting as the middle men between the client and the enforcer perceive the systemfairer. To test whether taxpayers’ are happy with the benefits they receive in exchange forthe taxes they pay, the exchange contract between taxpayer and the government was usedas a measure of fairness by Porcano (1988). Using 18 variables that were predicted toaffect tax evasion, Porcano, (1988) found that exchange with government was the onlyvariable that correlated with tax evasion. This study also referred to procedural justice(the procedure involved in the formulation of tax laws and enforcement strategies) to beincorporated as a measure of fairness. Porcano (1992) quoted Gerbing (1988) in hisstudies that exchange with government to be one dimension of tax fairness.In this context the equity theory predicts that taxpayer evaluate their contribution of taxfor the benefits that they can receive from the government. So if there are theconsiderations of equity in their decision then if they receive a public transfer (benefits)then they would comply as compared with those who didn’t receive. So equity matters todecision making on compliance and how it relates with their perceptions of fairness.However, to say that there is causal relationship between inequity and tax evasion(noncompliance) is not possible because of the uncertainty whether the reason is becauseof inequity or simply a means of excusing one to illegal behaviour, as indicated by Spicer& Becker (1992).There was no significant evidence to say that fairness affects their decision in complying.However if taxpayers consider equity is important then it will affect their decision so it isimportant to explain to them the return that they get from the government for their tax36

Hite & Roberts (1991) and Roberts & Hite (1994) discussed about the preferred tax ratesaying that increase in rate will increase compliance. The results by Kinsey & Grasmick(1993) were different i.e. progressive tax rate was judge unfair and chances of futurecases of tax cheating. Factors such as progressive versus proportional tax rates aresignificant variables to compliance behavior. This implies that there is difference in taxrate. In the Malaysian tax system the high income earners will fall into the higher taxbracket i.e. as the income increases the tax rate will also positively increase. According toReckers, Sanders, & Roark (1994) have stated that mildly progressive tax rate willpromote tax compliance. Their findings used ethical beliefs to test if compliance willreact to any marginal tax rate. However, the results showed not significant. The linkbetween tax rate and compliance as reported by Alm, Jackson, & Mckee (1992) is evidentfrom this study that compliance increase with lower tax rate because the ‘payoff’ benefitis greater when tax rate is larger. One other thing is that unreported income increase whenmarginal tax rate is highest.2.4.5 Dimension 5 - Self InterestEisenstein (1961) noted that judging from the ideology of equity, fairness is anindividualistic concept whereby the individual is the key determinant asking or arguingfor equity. McGowan (2000) mentioned many studies have found that self interest(defined as direct personal benefit) significantly affects taxpayers’ attitudes. Example,Hite (1990) tax shelters have direct relationship with fairness attitudes. Hite & Roberts(1991) found people with higher income believe progressive tax rate are more fair38

(vertical equity) or in other words favour a lower tax rate. Hite & Roberts (1992) statedhow the Tax Reform Act 1986 of the US showed that self interest separately appeared asa variable in explaining evaluations made by taxpayers’ whether a tax system is fair ornot. Self interest is not fairness but it affects taxpayer attitudes. Wartick (1994) foundpeople who were made worse off by a tax law change perceive the system to be less faircompared to those who were not affected. It means the tax liability of one increasesbecause of a new tax law or because in comparison with another individual either in thehigher income class or a middle income class then his attitudes towards fairness isimpacted. Only fairness is considered when a tax system is being evaluated. So whatexplanations can be given about self interest and tax compliance? Self interest is selfcentered, individualistic and what is given to one cannot be accepted as fair when givento another person. Christensen et al. (1994) found significance between self interest andtax cheating i.e. noncompliance. If an individual believes that the tax system is not fairthen he thinks noncompliance or evasion itself is justified. The taxpayer uses thereasoning that what he found not fair he just do not comply. However, if he has beenexposed to the tax system he will then believe the tax system is actually fair.In the study by Hite & Roberts (1992) using 10 specific tax reform changes to understandassociation between self interest and fairness the findings showed there is associationbetween fairness and self interest in the case of tax reforms and tax changes. Uponexamining the relationship between tax compliance and self interest when a new tax lawor new tax rule is introduced taxpayer knew that his liability is going to increase. So hiscompliance behavior will decrease to balance up with the impact the new rule brought in.39

Therefore the chances are underreporting will increase and honest tax reporting willdecrease. This creates an inverse relationship between self interest and tax compliance.Spicer & Becker (1980) used taxpayer’s tax rate and the tax rates of other taxpayers’ tooperationalize tax fairness. The results were evasion increased (decrease) when thesubjects were informed that their tax rate is higher than (less than) the tax rates of theothers. These results also were not consistent because other studies by Milliron (1985a)and Kaplan & Reckers (1985) found no relationship between tax rate and evasion.2.5 Demograhic Factors and Tax FairnessThe taxation literature has statements that demographic dimensions have impact on taxcompliance e.g. Andreoni et al. (1998) stating types of income affects compliance rate.The study also reported noncompliance was higher among taxpayer over 65 years old.Another by Feinstein (1991) stating the rate and degree of noncompliance is less withhouseholds who are over 65 years old. Data from Taxpayer Compliance MeasurementProgram (TCMP) used by IRS of the US shows types of income affects compliance rates(US GAO, 1990). Dubin & Widle (1998) based the study on data from TCMP and censusstated noncompliance is greatest where a non-white population is high. Baldry (1987)based data from TCMP and census and found age and gender affect compliance rate.According to Chan et al. (2000) demographic variables indirectly affect tax complianceon three aspects; attitudes, perceptions and noncompliance opportunity.40

Jackson & Milliron (1986) found that gender has an influence on tax compliance;younger, single males are more likely to evade. Other previous studies that showedsignificant differences between male and female as indicated in the literature are (Kinsey& Grasmick, 1993; Mason & Calvin, 1978; Porcano, 1988; Vogel, 1974; and Wenzel,2002). Age is another demographic factor found to have a positive link with taxcompliance. Researchers of tax compliance studies like (Vogel, 1974 and Mason et al,1975) have stated that older taxpayers’ are more compliant. However, as mentioned byMcGowan (2000), generally studies do not show clear systematic patterns of howdemographic factors affect taxpayers’ perception on fairness.Richardson (2006) has used demographic factor as a control variable also. Researchersfelt that demographic variables affect tax compliance through indirect means such as theattitudes and noncompliance opportunity. For the purpose of this study demographic datawas collected to consider the impact on tax compliance behaviour directly and alsoindirectly (age and gender).Prior studies mostly have tested the direct associationbetween demographic factor with tax compliance and as compared with those that havetested the association of the impact of tax fairness on demographic factors that ultimatelyaffects tax compliance behaviour.Jackson & Milliron (1986) were the first to consider the impact of demographic factor ontax compliance by looking at the direct impact of demographic factors such as age,gender, education, income level, income source, marginal tax rate, fairness, complexity,and revenue authority and tax morale. Richardson (2006) reported that older taxpayers41

are more compliant than younger taxpayers. The younger are risk seeking, less sensitiveto penalties. In the present study, respondents were asked to complete demographicquestions about age, gender, and education and employment status and were tested.AgeOlder taxpayers’ are more compliant then younger taxpayers’. However, according toDevos,( 2001) there have been significant number of studies that have found norelationship between age and compliance. In relation to this Richardson & Sawyer (2001)proposed four possible explanations for this inconsistency; first the significance of agedoes not extend to all taxpayers’. Second, there is inconsistent definition of taxpayernoncompliance being used throughout the research. Third, when age is considered withother variables its impact on taxpayers’ compliance is diluted, and finally the interactionof age with other variables is disturbed. Wenzel (2002) stated that the impact of agedepends on the specific form of tax paying behaviour and this could be one reason forhaving inconsistent results. Age has been related to different opportunities to avoid taxe.g. older taxpayer would have acquired sufficient assets or wealthy therefore their taxnoncompliance will be lower compared to younger taxpayers’ who are still active inacquiring wealth and plan strategies such as underreporting and exaggerate deductions.GenderTorgler (1993) investigated the role of gender difference towards tax compliance.Hasseldine (1999) stated, there exist voluminous literature on gender differences but intax compliance studies little emphasis has been focused on gender and the reasons for the42

differences. Therefore the findings are inconsistent. An interesting study by Gërxhani(2007) used institutional theory to explain gender differences. However, the study did notfind statistically significant support that men evade taxes more than women. The questionwas whether woman are the fairer sex who are more tax compliant than their malecounterparts. And is man less complaint and has lower tax morale than woman. As acourse of the effect of gender influencing the perception of tax fairness the need tocontrol the demographic variable was necessary to get the true findings of tax fairness asa stand alone. Gender of respondents contribute to predict the types of tax compliancee.g. in income reporting and deduction. This is found to be consistent with previousfindings of Mason & Calvin (1978), Porcano (1988), Vogel (1974) and Kinsey &Grasmick (1993). Research by Fallan (1999) which was designed to test how gender canimpact tax fairness by conducting pre and post test for the subjects showed there were nosignificant difference in attitude towards the fairness of the tax system between male andfemale tax students be it law students or marketing students. The result was that genderdo not take claim to show significance on changes in attitudes of tax fairness. However,in this study first, gender will be treated as a general variable and then only tested as adummy variable i.e. differentiating it from the male to know its impact on taxpayers’perceptions of tax fairness and then their tax reporting attitudes.EducationEducation has always been an independent variable to examine the impact of generaleducation like many other constructs that ultimately effect tax compliance behaviour.Basically it is viewed as tax knowledge and there has been increased in ethical reasoning43

with education. Distributive justice by Levanthal (1976) stated that individual knowledgeon the concept of justice is learned through education. Findings by Christensen et al.(1994) showed that tax education has proven significant to taxpayers that information andclarification on tax matters will help to judge the system as fair. According to Roberts(1994) and Wartick (1994) educating taxpayers’ the tax system or presenting justificationfor certain tax provision enhances fairness perceptions which will ultimately influencetax compliance levels. There are only a few studies that used education to mediate thecompliance rate of taxpayers. But one interesting point discovered by Jackson & Milliron(1986) is that the impact can be in two ways; one education will help the people tobecome more knowledgeable about the tax system that will make them understand theirobligations towards their country and government and appreciate the benefits receivedfrom the government but the other one would be they misuse the knowledge to becomemore aware of the tax loopholes and engage in tax evasion activities.Song and Yarbrough (1978) studied on tax ethics that played a key role in influencingtaxpayers’ complaint behaviour. The results on level of education showed a strongcorrelation with R² is 26%. A point to note here, in taxation research since there are toomany determinants to tax compliance when only variables coming from the numerousfactors are put together for test, then a bigger part of the variance can be explained.According to Fallan (1999), the pre and post test on male and female students fromdifferent areas of study has shown that exposure to better tax knowledge has a significantinfluence towards the fairness of the tax system. Therefore, tax knowledge helps todevelop a fairer attitude towards tax system and that will enhance compliance. But in this44

study education which is a noncompliance opportunity variable is tested with tax fairnessto understand the indirect association on tax compliance. Therefore the attitude willdefinitely have an impact on the compliance behaviour.Employment /Occupations statusGenerally research use income as a factor that has influence on tax compliance. Theincome will be divided into middle income and high income levels. However, occupationstatus or employment status which refers to respondents’ nature of job and the institutionsthat he is employed can be tested to understand the impact of tax compliance. Thischapter ends with a summary.2.6 Chapter SummaryThe literature review considered the tax compliance research and the main approaches i.e.economic and non economic to understand the determinants of tax compliance. Taxcompliance research about fairness and compliance has basically focused three theories;distributive theory, procedural theory and the role of legitimacy and equity theory.However, emphasis was also given to the economic and non economic approach toinform that the deterrence is still important for achieving tax compliance. Evaluation onperceptions on tax fairness was given considerable focus to understand its influence oncompliance. Several studies by Spicer (1974), Song & Yarbrough (1978), Roberts (1994),Chan et al. (2000) and Richardson (2006) found a significant relationship or link between45

tax fairness and tax compliance. The same were found with the demographic factors,however not all the dimensions were significant. This present study replicates Richardson(2006) to examine the significant correlations and impact of dimensions of tax fairnesswith taxpayer compliance behaviour in the Malaysian context46

CHAPTER 3: METHODOLOGY3.0 Chapter OverviewThis chapter will cover the methodology used in this study. The sections that will becovered will be the research instrument, sampling design, data collection procedure anddata analysis techniques.3.1 Research InstrumentThe survey instrument used in this study is a 2-page self administered questionnaire withcover letter. This survey instrument used in the present study was found from Richardson(2006) and also from Yankelovich (1984) while reviewing the tax fairness and taxcompliance literature. Richardson (2006) modified and used the most mentioned Gerbing(1988) questionnaire that was done to empirically measure taxpayers’ perceptions of taxfairness in US in 1988. However, only 17 questions were used after performing factoranalysis. Studies by Christensen et al. (1994) and Christensen et al. (1996) also had usedquestions from Gerbing (1988) which were modified accordingly as required by thestudies.In this present study, initially the 20 items were decided to be used, however uponfinalizing the questions, two items measuring middle income earners share/burden of taxhad to be dropped because there is no clear definition for middle income earners class.This dimension was actually added by Richardson (2006) suited for the respondents in47

Hong Kong and didn’t provide clear definition about it. In addition it was not adimension tested and identified by Gerbing (1988) as a dimension of tax fairness. Afurther comparison was made with Christensen (1994) for the number of question on thefive dimensions. As for tax rate / structure only three items similar to Christensen (2004)were used instead of four items by Richardson (2006).Thus, finally tax fairness tested inthis study has five dimensions with 17 items only.The present questionnaire is divided into three sections containing 36 items. Section 1covers five tax fairness dimensions and has 17 questions in total and each dimension hasspecific number of items which was presented in a Likert type-scale with a 5- point scalefrom 1 – “Strongly Disagree” to 5 - “Strongly Agree”. The items of tax fairness wereused to measure the perceptions of tax fairness dimensions among respondents. Thequestionnaire will identify how taxpayers’ perceive the tax system in Malaysia judgingfrom the level of taxpayers’ perception on tax fairness. The dimensions of tax fairnessbeing measured are; General Fairness, Self Interest, Special Provision for the wealthy,Exchange with the Government, and Tax Rate. As for the first three questions on GeneralFairness using Likert scale-type; 1 denoting “Very Fair” and 5 – “Very UnFair”, thusthese questions had to be recoded to be consistent with the rest of the questions in thesurvey. The three questions measuring General Fairness that were recoded are assummarized in Table 3.1. However, there were two more questions relating to GeneralFairness and Distribution of burden which were placed on a 5 - point Likert type-scalewith 1 – “Strongly Disagree” to 5 – “Strongly Agree”.48

Table 3.1: Reversed Coded Items on General FairnessQuestionsQ1Q2Q3StatementFor the average taxpayer I think that the income tax system isFor me personally , I believe that the income tax system iseGenerally, I believe that the manner in which the income-tax burden issdistributed across tax payers isTable 3.2 shows the other five dimensions relating to tax fairness and the number of thequestions as stated in the questionnaire.Table 3.2: Dimensions and Statements Measuring Tax FairnessNo DimensionNumber of Questions1 General Fairness Question No 1-52 Self Interest Question No 6,7,143 Special Provision for wealthy Question No 8,9.104 Tax rate Question No 11,12,135 Exchange with Government Question No 15,16,17Section 2 covers questions on the dependent variable which is the noncompliancebehaviour which has 15 items, also with 5 - point Likert type-scale from 1 – “StronglyAgree” to 5 - “Strongly Disagree”. The scale value for 1 is Strongly Agree which is theopposite compared to the value assigned to 1 which is Strongly Disagree of the scale fortax fairness. This is because the items used by Richardson (2006) to measure taxcompliance behaviour are on noncompliance attitudes such as underreporting and tax49

cheating (measuring honest or dishonest). Thus with 15 questions on tax noncompliantbehaviour the lowest score will be 15 which indicates high noncompliance, to 75,indicating the highest compliance. Richardson (2006) has taken the survey questions fortax compliance developed by Yankelovich et al. (1984). Other prior researchers e.g.,Galligan & Richardson (2005); Roberts (1994); Christensen et al. (1994) had usedquestions from the Yankelovich et al. (1984) scale respectively. The Yankelovich et al.(1984) scale measure the following aspects of tax noncompliance behaviour.Table 3.3: Tax Noncompliance ItemsItem No.TComp 1TComp 2TComp 3TComp 4TComp 5TComp 6TComp 7TComp 8TComp 9TComp 10TComp 11TComp 12TComp 13TComp14TComp15MeasuringBartering goods and servicesOutside incomeCash incomeInvestment incomeBusiness ExpensesMedical ExpensesRich peopleHigh tax ratesChanceEnds meetGovernment spendingDeserveDoesn’t hurtGetting caughtOccasionalAs stated by Roberts (1994), this research is only focused to know the noncompliancebehaviour in general, and not to find out the types of noncompliance. Then Section 3 ofthe questionnaire has four items on demographic characteristics of the respondent. Therespondents merely had to tick the appropriate columns. All the questions were closeended. The next paragraph will write about the sampling design of the study.50

3.2 Sampling DesignA non probability sampling method was used whereby convenient sampling was appliedto administer the questionnaires. Furthermore, as this research is exploratory in nature,convenience sampling was found to be the best suited. Another reason was thattaxpayers’ were able to be approached directly and majority of them respondedanswering the survey immediately. The respondents in this study were registeredtaxpayers’ at four Inland Revenue Board (IRB) Branch offices in Federal Territory(Wilayah Persekutuan) namely Jalan Duta, Cheras, Wangsa Maju, and Kuala LumpurBandar. The findings were analyzed using SPSS Version 15. The next section will be onthe data collection procedures.3.3 Data Collection ProceduresThe instrument used for this research was administered by way of a survey questionnaire.Prior to collection of data, an official written request to conduct the survey on taxpayers’registered in the Federal Territory IRB branches was made to the IRB, Regional Directorof Federal Territory. Permission was granted to conduct the survey at the one stopcounters at the four IRB offices. A target to achieve responses from at least 500 taxpayerscovering the Federal Territory IRB offices was set, however only 404 were able to berecollected. After eliminating incomplete surveys a final balance of 390 were usable.The questionnaires were first distributed to the four IRB one stop counters to be given totaxpayers’ who visit these counters for their tax matters during the survey period.51

Basically the questionnaire were passed to the taxpayers at two encounters; one whilethey were waiting to be attended and the other after they had been attended and settledtheir tax matters. At all occasions the researcher was present at all the four branchesalternatively for a period of 4 weeks handling the survey questionnaires personally and inthe absence, the IRB staff at the one stop counters handle the survey questionnaires.Generally, taxpayers’ were easy to be approached. However, there were occasions wheretaxpayers’ were reluctant to give cooperation by citing reasons such as ‘in a rush’, ‘Ialready have another appointment’ and ‘next time’. Survey questionnaires were collected/ returned upon completion by the taxpayers but many a number have taken the surveyshome. Taxpayers’ who were approached requested for clarifications of what this surveyis all about and mostly wanted to know what they would benefit by responding to thesurvey. Clarifications of the purpose of the survey were given and taxpayers were toldthat this is a study to understand if perceptions of tax fairness play a key role indetermining their tax compliance behaviour in Malaysia. Generally the taxpayers’ wereexcited to take part and express some additional views and suggestions.3.4 Data AnalysisThe data was analyzed by using SPSS version 15. After the raw data was keyed in it waschecked for errors and then descriptive analysis was done. Mean analysis, followed byPrincipal components factors analysis. Then, correlation test, T test and finally multipleregressions. In order to find answers to the three research questions as stated in chapter 1,52

correlations and multiple regression analysis was used; first to find out if there existdirect association between tax fairness construct as the independent variable with taxcompliant behaviour, second to find out how much demographic variables (age, gender,education and employment status) have impact on tax compliance (in conjunction withtax fairness). The third purpose was to go a step further from the second test, to find outif specific groups in demographic variables (in conjunction with the tax fairnessperceptions dimensions) show differences on tax compliance. This was done bycontrolling two of the demographic variables age (older and younger) and gender (maleand female). All the regression analysis was done using the models developed by theprevious researcher.3.5 Chapter SummaryThe methodology and instruments in this study is adopted from the previous research(Richardson2006 and Christensen 1994). However the sampling for this study wasregistered taxpayers’ compared to MBA students by the previous study. It wasconvenience sampling and a total of 404 registered taxpayers’ participated.53

CHAPTER 4: RESEARCH RESULTS4.0 Chapter OverviewThis chapter will discuss the results of the data analysis. It begins with the generaldescriptive characteristics of respondents’ profile. Then the analysis on the perceptions ofthe respondents’ judgment of the system and their tax compliance behaviour based on thedescriptive statistics (mean score) of the independent and the dependent variablesrespectively. Then, factor loadings for tax fairness and tax compliance followed byCronbach’s Alpha internal reliability test and results examined. Followed by, the resultsof correlations between tax fairness and tax compliance with and without demographicfactors will be presented. Finally the regression analysis to show the statisticallysignificant dimensions and its influence in the Malaysian context with and withoutdemographic factors and the impact when demographic factors, age and gender werecontrolled (in conjunction with the tax fairness dimensions) including a t test(attached inthe appendix) is also done for these two control variables.4.1 Characteristics of the RespondentsInitially a target was set to reach at least 500 individual taxpayers. After successfullydoing the survey a final count of 404 questionnaires were collected back with 14 rejecteddue to incompleteness and the balanced of 390 were usable. The usable rate of questionsreturned was 78%. The samples were individual taxpayers whose files were registered at54

the four Federal Territory IRB branches namely Jalan Duta, Wangsa Maju, Cheras andKuala Lumpur Bandar. Table 4.1 presents the descriptive statistics of the 390 surveyrespondents in the sample. However, males were dominant, comprising 53.3 % of thetotal respondents. The age factor of the respondent’s profile was surprisingly equallydivided, it had 50% strength in the younger and 50% in the older groups. Two mean agegroups were prominent among the respondents; one 34 years (30.8%) and the other 49years (45.6%). In total this groups make up 298 respondents (76.4%) of the total sample.The age groups of 20, 20-29 and 30-39 years were further classified as youngertaxpayers’ and the 40-49 and above 60 years old were classified as older taxpayers’ forpurposes of testing the H2 significance that older taxpayers’ are more compliantcompared to younger taxpayers’. Almost 24.1% of the respondents had at least highschool education. As the hierarchy goes up diploma and degree holders represented 239taxpayers (61.3%) and a smaller number of 8.2% were even more highly educated.The mean for education was 3.12 indicating most of the taxpayers have higher secondaryand diploma as their qualifications. This descriptive statistics is different from theprevious study which used MBA students as its subject. The present subject’s profile ismuch well distributed because it is represented by real taxpayers. The composition wasnatural and realistically displayed. One important thing also portraits itself out, i.e. theliteracy level in Malaysia is high. Next, the employment status reveals 107(27.4 %) oftaxpayers’ were government employees while 184 (47.2 %) were employed in the privatesector. Only 56 (14.4%) taxpayers’ were self employed or having their own businesswhile 43 of them (11%) did not identify their employment status. The employment statusindicates that most of the taxpayers’ were salaried (74%) i.e. 291 taxpayers’.55

Table 4.1: Respondents’ ProfileItem Frequency %GenderMale 208 53.3Female 182 46.7Total 390 100AgeBelow 20 years 4 1.020 – 29 years 71 18.230 – 39 years 120 30.840 – 59 years 178 45.6Above 60 years 17 4.40Total 390 100EducationSPM 25 6.4STPM 94 24.1Diploma 114 29.2Bachelors 125 32.1Master/Doctorate 32 8.2Total 390 100Employment statusGovernment 107 27.4Private 184 47.2Self Employed/Own Business 56 14.4Others 43 11.0Total 390 1004.2 Perception on Tax Fairness and Tax Compliance – Mean AnalysisThe survey instrument used in this study for tax fairness was replicated from the previousstudy by Richardson (2006) but modified. To find out about the perceptions of theMalaysian taxpayers’ on the tax system and also their tax compliance attitudes, the mean56

analysis was carried out. Firstly, the mean scores results for all item measured under thefive tax fairness dimension is observed to deduce likely outcome from this study i.e. toknow how Malaysians generally perceive the current tax system. Table 4.2 shows themeans and standard deviations for each of the items on the five dimensions of taxfairness. As for the dimension on General Fairness all the 5 items showed scores between3.19 and 3.48 (above mid point). Basically the mean scores of all items on tax fairnessscored 3.00 except two items which scored below 3.00 points which are, one item on selfinterest scored 2.69, and another item on exchange with government scoring 2.92. Byanalyzing the overall mean scores, it can be concluded that the Malaysian taxpayers’perceive the tax system as moderately fair.Secondly, as for the dependent variable tax compliance, mean scores were analyzed todiscover whether these taxpayers’ are compliant or noncompliant. Table 4.3 presents themean and standard deviation of tax compliance.15 items were used to measurehypothetical noncompliance attitudes to evaluate whether taxpayers’ are honest ordishonest in their tax reporting behaviour. The preliminary prediction based on the Likerttype-scale (1 strongly agree through 5 strongly disagree), taxpayers’ who are honestshould record scores higher than dishonest taxpayers’. The results in Table 4.3 weresimilar to the prediction. 14 items recorded mean scores of values within the range of3.02 to 3.29. Only Tcomp 1 scored 2.96. Tcomp 1 was an item on doing business bybarter trading and then not reporting it as income. Thus for the final analysis Tcomp 1was dropped due to the low scores and the same was done by Richardson (2006).57

Table 4.2: Mean and Standard Deviation (SD) for Tax Fairness DimensionsItem/Scales Mean S.DGeneral FairnessFor the average taxpayer I think that the income tax system is 3.37 0.945For me personally , I believe that the income tax system is 3.48 0.892Generally, I believe that the manner in which the income3.19 0.988Tax burden is distributed across tax payers isGenerally, I feel that the income tax is a fair tax 3.35 1.025On the whole the burden of income taxes is fairly distributed 3.27 0.972Exchange with governmentI get my fair value in terms of benefits received from the governmentexample , education, medical, infrastructureThe income taxes that I have to pay are unreasonable high considering thebenefits provided by the governmentThe benefits I receive from the government in exchange for my income-taxpayments are reasonable3.14 1.1253.14 1.1412.92 1.073Self InterestCurrent tax laws require me to pay more than my fair share of income taxes 3.14 1.027Compared to other tax payers , I pay less than my fair share of income taxes 2.69 1.058Compared to the amount paid by more wealthy taxpayer’, I pay more thanmy fair share of income taxes3.09 1.040SpecialSpecial provisions in the income tax law that apply only to a few people areunfairSome perfectly legal tax deductions are not fair because only the wealthy arein a position to use themPeople whose income is about the same as mine should pay the same amountof income tax regardless of what kind of investments they make, how manydependents they have or what their other financial obligations are3.36 0.8693.37 0.9273.46 0.931Tax RateHigh-income tax earners have a greater ability to pay income taxes, so it is 3.31 0.049fair that they should pay a higher rate of tax than low-income tax earnersIt is fair that high-income tax earners pay proportionately more tax than lowincome3.62 0.049earnersA ‘fair’ tax rate means it should be the same for everyone 3.66 0.04858

Table 4.3: Mean and Standard Deviation (SD) of Tax complianceItem Mean S DTcomp1 2.96 1.083Tcomp2 3.13 1.065Tcomp3 3.23 1.090Tcomp4 3.27 1.013Tcomp5 3.31 0.977Tcomp6 3.22 1.017Tcomp7 3.21 1.115Tcomp8 3.18 1.037Tcomp9 3.14 0.971Tcomp10 3.09 1.057Tcomp11 3.02 1.099Tcomp12 3.15 0.973Tcomp13 3.27 0.995Tcomp14 3.29 0.985Tcomp15 3.21 1.002Note: Tcomp= Taxcompliance, N = 390Next, Table 4.4 was drawn to summarize the means of each of the dimensions of taxfairness and also the tax compliance variables The results of the mean scores of the fivetax fairness dimensions showed that the range of the score was 61% to 66% which meansthat about 64% of taxpayers’ find the system fair. And as for the tax complianceconstruct, the mean score was 44.71. The mean value was only 9.71 points higher fromthe midpoint of 35.0(lowest score 14 and highest 70). Thus it showed that about 64% oftaxpayers’ were compliant (honest in their tax reporting behaviour) while the rest of themwere dishonest. Therefore Malaysian taxpayers’ showed moderate compliance only.Next, factor analysis was conducted to validate whether Malaysian taxpayers’ identifiedtax fairness under the same dimensions or differently. The results showed Malaysianhave grouped the five dimensions to mean only three dimensions.59

Table 4.4: Mean Score for each Dimension of Tax Fairness and Mean Score of TaxCompliance (N = 390)TComp TGenF TSelf Ttrate TSpec TExchMean 44.71 16.67 8.92 10.58 10.19 9.19Std deviation 10.21 3.81 2.20 2.02 2.09 2.09Skewness -0.102 -0.123 0.200 -0.153 -0.330 -0.247Kurtosis 0.321 -.093 .155 0.469 .631 1.185Min 14 5 3 3 3 3Max 70 25 15 15 15 15Note: GenF= general fairness, Self =self interest, Spec= special provision forhigh income earners, Trate = tax rate, Exch = exchange with the government,TComp= tax compliance4.3 Factor AnalysisFactor analysis is a statistical method to reduce a large set of related variables intosmaller set of components or dimensions. Before factor analysis can be conducted,sufficient sample size should be ensured. Tabachnick and Fidell (2001) suggest suitabilityof data and approach must be determined before factor analysis is conducted.4.3.1 Factor Analysis for Dimensions of Tax FairnessPrincipal component method was used and components extracted by way of varimaxrotation. Inspection of the correlation matrix coefficients was greater than 0.30, thus60

factor analysis was considered appropriate according to Tabachnick and Fidell (2001).Next, criteria, the Bartlett’s test of sphericity should be significant and Kaiser-Meyer-Olkin (KMO) is between the ranges of 0 to 1, with 0.6 as the minimum level. The resultsof the Barlett’s test were significant with chi square =1879.60, KMO was 0.762 above therecommended value of 0.6 meaning that factor analysis was appropriate for the data.Inspection of the scree plot showed the break clearly happened after three factors. Therotated factors also showed only 3 factors. Therefore these three factors were maintainedfor further analysis.Table 4.5 reports the factor analysis output. Factor one, two and three with eigenvalue ≥ 1explains 21.783%, 13.796% and 10.431% respectively. In total the three factors explain46.01% of the variance. Factor one has seven statements comprising of two dimensions.Factor two also has two dimensions comprising of six statements. Factor three has threestatements. The factor analysis results revealed that the same tax fairness dimension thatexisted in the other jurisdiction like US, UK, Australia and Hong Kong cannot be appliedin the Malaysia context as a single isolated dimension. This study has provided a newexplanation. Factor one which has two dimensions; general fairness and distribution oftax burden plus exchange with government consist of statements or responses that refer tofairness of the tax system. As for Factor two which groups two dimensions; specialprivileges for the wealthy and tax rate contains all statements or responses which disagreethat the tax is fair (the system is unfair). The only exception was self interest which wasfound to remain isolated like in other studies.61

Table 4.5: Items of Tax Fairness Factor Loadings, KMO Bartlett’s TestFactor LoadingItems: Tax FairnessF1 F2 F3For the average taxpayer I think that the income tax system is .746For me personally, I believe that the income tax system is .779Generally, I believe that the manner in which the income tax burdenis distributed across taxpayers’ is.763Generally I feel that the income tax is a fair tax .778On the whole the burden if income taxes is fairly distributed .712The benefits that I receive form the government in exchange for myincome tax payments are reasonable.570I get my fair value in terms of benefits received from thegovernment example, education, medical, infrastructure.482Some perfectly legal tax deductions are not fair because only thewealthy are in a position to use them.709People whose income is about mine should pay the same amount ofincome tax regardless of what kind of investment they make, how.699many dependents they or what their other financial obligations areHigh-income tax earners have a greater ability to pay income taxes,.565so it is fair that they should pay a higher rate of tax than lowincometax earnersSpecial provisions in the income tax law that apply only to a fewpeople are unfair.535A fair tax rate means it should be the same for everyone .479It is fair that high-income tax earners pay proportionately more taxthan low-income earners.464Compared to other tax payers , I pay less than my fair share ofincome taxes. 721Current tax laws requires me to pay more than my fair share ofincome taxes.594Compared to the amount paid by more wealthy taxpayer’, I paymore than my fair share of income taxes.502Eigenvalue 3.75 2.468 1.604% of variance 21.78 13.79 10.43Cumulative % 21.78 35.57 46.01KMO measure of sampling adequacy =0.762Bartlett’s Test of Sphericity (Chi-square= 1879.60, p

paid is fair to himself). Based on the factor analysis results, the study will now have threedimensions; Dimension1 to mean General fairness and exchange, Dimension 2 to meantax rate structure and special privileges and Dimension 3 which shall remain as SelfInterest. The following paragraph will present the results of factor analysis for TaxCompliance items.4.3.2 Factor Analysis for Tax Compliance ItemsTable 4.6: Factor Loadings for Tax Compliance Items, KMO Bartlett’s TestItemsFactor Loadings F1Tcomp 1 .577Tcomp2 .652Tcomp3 .679Tcomp4 .736Tcomp5 .705Tcomp6 .711Tcomp7 .745Tcomp8 .764Tcomp9 .738Tcomp10 .686Tcomp11 .771Tcomp12 .765Tcomp13 .689Tcomp14 .725KMO measures of sampling adequacy =.930Barlett’s Test of Sphericity, Chi square = 3010.20Eigenvalue 7.097% of variance 50.68Table 4.6 shows the factor analysis output for tax compliance items. The items werefactor loaded at 0.40. Principal component analysis extracted a single factor witheigenvalue ≥ 7.097 similar to the Richardson (2006). Next are results of internalreliability test.63

4.4 Reliability Test for Internal ConsistencyThe Cronbach’s coefficient alpha was tested for both the tax fairness and tax complianceitems. Table 4.7 reports the alpha scores for all the variables. The Cronbach’s alphacoefficient was within the acceptable level of reliability of 0.70 as proposed by Nunnally(1967 & 1978) for exploratory studies. The tax fairness and tax compliance items showedalpha value of 0.72 and 0.92 respectively. Therefore it indicates that the dimensions usedare reliable. These values were consistent with prior researches (e.g., Richardson 2006,and Roberts 1994).Table 4.7: Cronbach Alpha for Tax Fairness and Tax compliance VariablesVariables Cronbach’s Alpha No. of ItemsTax Fairness 0.72 16Tax Compliance 0.924 144.5 Pearson Product-Moment Correlations between Tax Fairness andTax ComplianceCorrelation analysis was conducted to investigate the associations including the strengthand the directions of the association between the independent variable with the dependentvariable (Pallant, 2001). The levels of strength of relationships; small, medium and largewhich is to be determined based on the value of Pearson correlation (r), Cohen (1988).Correlations Matrix 1 and Matrix 2 were drawn to analyze first, (Matrix 1) the directassociations between the five dimensions of Tax Fairness(independent variable) and TaxCompliance (dependent variable) and then (Matrix 2) with the same independent and64

dependent variables but having the demographic factors included. The Pearson-momentcorrelation Matrix 1 and 2 were used to test and analyze research question 1 andhypothesis H1.4.5.1 Correlation Matrix 1- Direct Association between Tax Fairness and TaxComplianceAnalysis on Research question 1 and H1:Table 4.8 shows the correlation Matrix 1 results. The correlation analysis has indicatedthat dimensions 1 and 3 were significant. Dimension 1- GenFairness was significant atthe p

Table 4.8: Correlations Matrix 1 - Tax Fairness Dimensions and Tax ComplianceTComp 1TCompGenFairnessGenF + ExchTstructureTrate + SpecGenFairness(GenF + Exch)0.130** 1Tstructure(Trate + Spec)0.25 0.117 1SelfInt -0.308** 0.009 0.189 1SelfInt*significant at p< 0.05 **Abbreviation: TComp= tax compliance, GenFairness= general fairness plus exchange,SelfInt = self interest, Tstructure = tax rate plus special provisionThe value of coefficient r for Dimension 1 is considered in the small range however itshowed that general fairness and exchange has influenced taxpayers’ attitudes towardscompliance. This result is consistent with findings by (Hite & Roberts1992) which statedthat perceptions of fairness are positively related to expectations that if the tax system isfair taxpayers’ will comply. This also provides further explanations to understand thebehaviour of individuals who belief that if the tax system is unfair then it is justified ifthere is under reporting or having dishonest attitudes. In additions the results supportedGerbing’s (1988) findings that general fairness and distribution of tax burden is adimension of tax fairness. Based on the correlation results, the research question isanswered partially providing preliminary support for hypothesis H1. Thus, no conclusioncould be drawn using correlations results alone, H1 has to be tested further by performingOLS multiple regression analysis and the results are reported in Table 4.9(Model 1).Table4.8A presents correlations Matrix 2 results between demographic factors (in conjunctionwith the tax fairness dimensions) with tax compliance.66

4.5.2 Correlation Matrix 2 between Tax Fairness, Demographic factors and TaxComplianceResearch question 2:Do age, gender, educations level and employment status haveimpact on tax fairness and indirectly influence tax compliance.Table 4.8A shows the results of Correlations Matrix 2. Demographic factors; gender,age, education and employment status (in conjunction with tax fairness) when correlatedwith tax compliance, only education was found to be significantly correlated with r =0.123 at p< 0.05. However, Richardson (2006) stated that age and gender weresignificantly correlated. The reason could be that the sample was MBA students whowere with high education background. The earlier two significant tax fairness dimensionsin Matrix 1 still remained significant in the second Matrix model.In this Malaysian setting, demographic factors when applied (in conjunction with taxfairness dimensions) don’t show great impact on tax compliance. Thus research question2 is partially supported because only education was the only significant demographicfactor (in conjunction with tax fairness dimensions) on tax compliance. The data wasfurther explored using OLS multiple regressions to examine the four hypotheses H2 to H5which are discussed in the next section. For the purpose of correlation and regressionanalysis, factor scale score was used for each value of the dimension being tested as wasdone by Richardson (2006).Factor scale score is the regression weight of each item thatmakes up the dimension. In order to get the score for a dimension the items usingregression weights which were extracted from factor analysis were added up. The factorscore is then saved and used for further regression analysis.68

4.6 OLS Multiple Regression AnalysisTo investigate the associations of the independent variable Tax Fairness with thedependent variable Tax Compliance the data were analyzed using OLS multipleregression analysis. The two regression models used by Richardson (2006) were modifiedbased on the factor analysis output. Regression Model 1 identify the direct impact taxfairness has on tax compliance. Regression Model 2 includes both the tax fairnessdimensions and the demographic factors as the independent variables. Model 3a and 3btest further using the dummy variables. As recommended by Richardson (2006) theimpact of multicollinearity was analyzed. Dewberry (2004) stated the tolerance and VIF(variance inflation factor) are the two ways of checking for multicollinerity problems.VIF (variance inflation factor) and tolerance were considered for all the three regressionModels in this study. Pallant (2005) stated that multicollinerity assumptions are notviolated if the Tolerance values are above 0.10 and the values of VIF are all less than 10.All the four regression Models were clear of multicollinearity problems.The two base regression models modified from Richardson (2006), estimated for eachrespondent in the sample:1 TCOMP i = α 0 + β 1 GenFairness i + β 2 Tstructure i + β 3 SELF i + E i2 TCOMP i = α 0 + β 1 GenFairness i + β 2 Tstructure i + β 3 SELF i +βkXki + E iAll the tax fairness dimensions (independent variable) were regressed across taxcompliance (dependent variable) in Model 1 to test the first hypothesis.69

4.6.1 H1: There is a positive association between general fairness and taxcompliance behaviour in MalaysiaTable 4.9 is a summary of Regression Model 1 and the output for H1. The model wassignificant at p

from a public good which was funded by the taxes that the government collected. On theother hand, if the perceived inequity is to his advantage, guilt feeling will reduce hisevasion.Table 4.9: Results Of Regression Analysis: Model 1, 2, 3a and 3bVariables R 2 Adj R 2 F Sig. F Beta VIF Tolt-valueSig.*Model 1 0.117 0.110 17.08 0.000Constant 2.87E-0.18 1.000GenFairness D 1 0.125 1.014 0.986 2.599 0.010**Tstructure D 2 0.071 1.052 0.951 1.456 0.146SelfInt D 3 -0.322 1.037 0.964 -6.616 0.000**Model 2 0.133 0.117 8.371 0.000Constant -0.778 0.020GenFairness D 1 0.134 1.052 0.951 2.739 0.006**Tstructure D 2 0.063 1.069 0.935 1.276 0.203SelfInt D 3 -0.308 1.089 0.918 -6.187 0.000**Gender 0.044 1.053 0.950 0.446 0.656Age 0.095 1.028 0972 1.693 0.091Education 0.091 1.103 0.906 1.941 0.053Employment 0.054 1.119 0,894 0.987 0.324Model 3 a Older 0.128 0.113 8.045 0.000Constant 0.510 0.069GenFairness D 1 0. 137 1.050 0.953 2.800 0.005**Tstructure D 2 0.064 1.073 0.932 1.296 0.196SelfInt D 3 -0.312 1.086 0.921 -6.258 0.000**Gender 0.038 1.052 0.951 0.384 0.701Education 0.092 1.112 0.899 1.946 0.052*Employment 0.059 1.115 0.897 1.079 0.281Age –Older 0.091 1.037 0.964 0.932 0.35Model 3 b F/Male 0.133 0.117 8.371 0.000Constant -0.735 0.011GenFairness D 1 0.134 1.052 0.951 2.739 0.006**Tstructure D 2 0.063 1.069 0.935 1.276 0.203SelfInt D 3 -0.308 1.089 0.918 -6.187 0.000**Female 0.044 1.053 0.950 0.446 0.656Age 0.095 1.028 0.972 1.693 0.091Education 0.091 1.103 0.906 1.941 0.053Employment 0.054 1.119 0.894 0.987 0.324a) Level of significance ; **p

The second predictor which was significant but negatively related is the Self Interestdimension. The questions on this dimension also had three items. The self interest refersto an individuals own priority and preferences. McGowan (2000) defines it as a directpersonal benefit which significantly affects taxpayer’s attitude. Tax compliance literaturehas stated that how the tax system or tax laws and tax acts are administered affectsindividual’s tax liability. Hite & Roberts (1992) stated that the perceptions of fairness arepositively related with one’s expected decrease in tax liability therefore it reflects ainverse relationship between tax fairness and tax compliance and this link is found to beconsistent in this present study.From the regression results, it is evident that the multidimensional characteristic of taxfairness is a factor for the inconsistent results, while supporting the same view (Jackson& Milliron, 1986). In sum, the regression analyses provide partial support for H1 and thecontention that tax fairness dimensions have impact on tax compliance.4.6.2 Analysis of Hypothesis 2 through 5 and research questions 2 and 3Model 2 tested the two independent variables (demographic factors and tax fairness) tofind out if there is any significant increase or decrease in the amount of variance thatcould be explained when two determinants are used to measure tax compliancebehaviour. Another regression was conducted using age and gender (dummy controlvariables) in Model 3a and 3b to test H2 and H3 specifically. At the same time, researchquestions 2 and 3 were analyzed. H2 – H5 stated in the alternative forms:72

H2: There is a positive association between older taxpayers’ and taxpayercompliance behaviour in MalaysiaH3: There is a positive association between female taxpayers’ and taxpayercompliance behaviour in MalaysiaH4: There is an association between education and taxpayer compliancebehaviour in MalaysiaH5: There is an association between employment status and taxpayer compliancebehaviour in MalaysiaTable 4.9 presents the summary of regression Model 2. It shows that the Model 2 issignificant at p

analyzed in Model 3a and 3b to know if significant difference could be found. Majorityof previous research basically used taxpayers’ general education levels as an approach tomeasure the impact of education on tax compliance attitudes. Levanthal (1976), Jackson& Milliron (1986), Christensen et al, (1994) all found positive association betweeneducation and tax compliance, whereas Song & Yarbrough (1978) found a negativerelationship. This can be explained whereby increased knowledge on tax matters inparticular can lead to tax noncompliance and evasion. Chan et al. (2000) reportededucation has an indirect positive link with taxpayer compliance via moral developments.People with more education are likely to have high level of moral development.Kassipillai (1996) postulated that tax compliance can be improved with increased taxknowledge of the taxpayer through formal education. In most compliance studieseducation was a mediating variable between tax fairness and tax compliance, e.g. Harris,(1989) studied two groups of students, one exposed to different types of tax educationand the other not. There was significant difference on perceptions of fairness between thetwo groups; the group that was exposed to tax knowledge took advantage to understandthe complexity of the system and perceive it unfair. Based on the regression results testedin Model 2 therefore H4 is accepted in this study.Singh (2003) has mentioned that age has been considered as one important demographicfactor in tax compliance research. The youngest subjects of most US studies are just 18only. Researchers include these young aged taxpayers’ as a factor in explaining taxcompliance behaviour. Most studies have shown a positive link between age and taxcompliance with some exceptions. Research on demographic factors done by (Jackson &74

Milliron, 1986; and Roth et al., 1989) found age to have an indirect positive effect ontaxpayers’ compliance .Therefore this regression results in Model 2 provide some earlysigns into accepting or rejecting H2 .By conducting further regression test as shown inModel 3a together with a t test, H2 will then be determined.The impact created by gender is quite inconsistent in this area of study. Fallan (1999)conducted a specific study to investigate whether exposure to tax knowledge createdifferences in attitude towards the tax system (fairness), using gender differences and theconclusion was that gender do not have predictive power on attitudes changes offairness. Studies by Chan et al. (2000) found no direct associations between gender andage as a predictor of tax compliance in both US and Hong Kong respondents.In fact Jackson & Milliron (1986) who were the first to provide evidence on the keyvariables such age, gender, education have argued that the gap between male and female(difference in gender) is narrow. This argument is also shared by Mason & Lowry (1981)and Grasmick et al. (1984). Gender when tested directly proved to be insignificant.However, H3 in this study was tested for gender differences between male and female toidentify if significant differences exist. The results of the regression are discussedrespectively in Model 3b. The results of these t - test are included in the Appendix.The last variable on demographic factor was employment statues and it was notsignificant .A regression between employment status and tax compliance revealed nosignificant association. The same results were also found in the previous study byRichardson (2006). In the present study the subjects were employed (private &government) or self employed. Hypothesis H5 is rejected.75

Model 3a band 3b was specifically to test the age group and gender if there were anysignificant difference between the younger and the older taxpayer and also between maleand female to find answers for H1 and H2 respectively.Model 3a (Older) and 3b (F/male) are summarized and presented in Table 4.9. Thefindings in this study showed there were no significant differences between the youngerand older taxpayers’ and gender (both using dummy variables) of the taxpayers’ onperceptions of fairness with tax compliance. Other studies e.g., (Hanno & Violette, 1996;Feinstein, 1991) have shown that younger taxpayers’ are less compliant compared toolder taxpayers’ but dominance of other factors it failed to show any association. Inaddition to the regression analysis, a T - test was also done and revealed no significantdifference between these dummy variables. Therefore, both H2 and H3 are rejected.4.6.3 Summary of Regression AnalysisTable 4.10: Summary of the hypothesis testing using OLS multiple regressionbetween independent, demographic (control) and dependent variablesHypothesis Association between variables Significant ConclusionH1TComp with GenFairness & Exchange YesH1 partiallyTComp with SelfIntYesacceptedTComp with TstructureNoH2 TComp with Older Taxpayer No H2 RejectedH3 TComp with Female Taxpayer No H3 RejectedH4 TComp with Education Yes H4 AcceptedH5 TComp with Employment status No H5 Rejected76

4.6.4 The Regression ModelsRegression Model 1TCOMP i = α 0 + β 1 GenFairness i + β 2 Tstructure i + β 3 SELF i + EiTComp = 2.87E -0.18 +0 .125GENFairness i + 0.071Tstructure i -0.322SELF i + E iRegression Model 2TCOMP i = α 0 + β 1 GenFairness i + β 2 Tstructure i + β 3 SELF i + βkXki + EiTComp =-0.778 + 0.134GENFairness i + 0.063 Tstructure i - 0.308SELF i + 0.095Age+ 0.044Gender + 0.091Education + 0.054Employment + Ei4.7 Chapter SummaryThis chapter discussed the results that Tax Fairness as the independent variable has beenable to show strong correlations. In addition two new dimension groupings wereidentified. Regression analysis showed that the models were fit and the results were onlypartially supporting the hypothesis. Since there was no other study that tested impact oftax fairness in isolation with tax compliance, thus no further comparison could be made.77

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS5.0 Chapter OverviewThis chapter deliberates the conclusion drawn from the findings of the study, directionsfor future research, makes recommendations and suggestions to IRB in achieving highercompliance levels and finally looks at the implications of the study.5.1 Discussion and ConclusionThe main purpose of this study was to find out whether tax fairness dimensions canpredict tax compliance behaviour among the Malaysian taxpayers’. The other intention isto find answers for all the research questions which ultimately lead to the hypothesistesting.5.1.1 Research Question 1 and H1Factor analysis showed that the five dimensions of tax fairness combined to form 3dimensions; GenFairness, Tstructure and Self Interest. However, GenFairnessincorporates general fairness and exchange with the government and Tstructure combinestax rate and special privileges. Therefore, correlations and regression results discussed inpara 4.5.1 and 4.6.1 provide partial support for research question 1 and H1. Taxpayers’have regarded general fairness and exchange as to mean similar. The combination of thisdimension is justified by referring back to a study by Metrejean & Cassidy (2000) whichchose academics as samples to interpret concepts of fairness as compared to generalpublic because these individuals have above average level of intelligence and are well78

ead in some areas. The results of the study indicated “a general ignorance of tax topics”,p 14. Therefore, the study has shown evidence that concepts and topics of tax fairness arequite uncommon or unknown to academics what more the taxpayers’ or general public.Keene (1983) further supported by saying that there are many areas the public makesunstable opinions with limited knowledge. So they interpret according to theirunderstanding neglecting the real concepts. Hite & Roberts (1991) argued public attitudesare important for lawmakers but understanding of information is crucial. Thus, thepresent study found the Malaysian taxpayers’ do not perceive general fairness andexchange with government differently. Sheffrin (1993) gave reasons that some issuesabout tax fairness are complex for the average taxpayer to understand. Another possiblereason could be due to he cultural differences between Malaysian and others. Incomparison with western countries, Malaysia rank highly as a power distance society sothe inequality is protected by this order.In comparing these results with the previous research conducted by Richardson (2006) inHong Kong only two dimensions that is general fairness and exchange with thegovernment was consistent in both studies and was in the expected direction too.Difference in sampling can be one reason for not having similar results. Richardson’s(2006) study used MBA students as the sample. These students were expected to havesome basic experience in making individual tax compliance decisions thus they may notbe well represented when tax paying behaviour is concerned. Generally the respondentswere also found to be young; 50% in the 20-29 age groups whereas those considered oldare in the range of 30-39 years and comprise of 44%. This might impact the amount of79

taxes they pay, and may not be paying taxes at all. However the present study’s samplesare very well represented in terms of experience in paying taxes. The respondents wereemployed in the private and public sector and also self employed. There would be lessbiasness as compared with the MBA students. The age composition was 50%representing 20-39 years old and another 50% representing 40-50 years old. Thereforetheir experience with the tax system has an influence on their decisions on tax mattersand their responses can be taken as more reliable. Mottiakavandar, Ramayah, Haron, andJili, (2003) conducted a study to look at the factors that influence compliance behaviourin Malaysia and found that there is a positive relationship between attitudes towards taxfairness of the tax system and tax compliance behaviour. The more positive the attitudetowards the fairness of the tax system, the more positive is the attitude towards one’s owncompliance. The trade with the government is a reflection of the taxpayers’ aspirationsand expectations towards the government so that they get value for their tax‘contribution’ to the government. According to James (2007), taxes can bring the citizensand the government together and the implementation of the tax laws depends on theability of the government to exercise that power. In fact for Malaysia, they still wantattention given to some specific aspects of fairness dimensions because they are stillunder the opinion that only a fair system can lead to positive tax compliance behaviour.As a conclusion, based on the present findings and discussion, H1 which is only partiallysupported is therefore partially accepted.5.1.2 Research Question 2 and 3 and H2 through H580

As for demographic results, not all the variables of demographic were able to show theirimpact because in this study, demographic was tested in conjunction with tax fairness andultimately how it will impact tax compliance behaviour. H2 through H5 wanted to findout the impact of demographic factors on tax compliance and additional regressionanalyses was performed to validate the hypothesis H2 and H3, if there were anysignificant differences in the subgroups (younger and older) of age and gender( male andfemale) on tax compliance. H2 through H5 when tested showed, only H4 (education) wassignificant.In the Malaysian study, age showed it has influence on tax compliance in conjunctionwith tax fairness when found marginally significant in regression Model 2 (p

in the pay statements and they have no control over it. A second t - test was done forgender by testing the means difference between male and female but still were found notsignificant. Mason & Lowry, 1981 Grasmick et al., 1984 said the gender effect may bewaning (weakening) and therefore does not show significant results. This can be furtherexplained especially in the case of Malaysia, women have equal shares and right indecision making therefore their tax reporting behaviour does not differ from the males.Therefore H2, H3 and H5 are rejected and H4 is accepted.As a conclusion, perceptions of tax fairness have been found to be one of thedeterminants of tax compliance behaviour and therefore have attracted researchers tostudy this unique construct. And the findings showed that there are significantassociations to individuals’ perceptions towards fairness of the tax system that ultimatelyhas impact on the individual’s tax compliant behaviour. Furthermore themultidimensional concept of tax fairness caused inconsistencies in the findings. However,additional research using different sampling and different setting can develop overallmeasure of a fair tax system. The general intention is to motivate and change perceptionsof individual taxpayers’ to believe that the tax system is a fair and equitable one. In orderto achieve that, enough emphasis through education should be focused to change theperception of tax fairness among taxpayers’ in order to achieve higher cooperation.5.2 Direction for Future Research and SuggestionAs for some direction for future research, researcher in this area of study might want to82

explore further on the new dimensions found discovered in this exploratory study. Acomprehensive study need to be considered to further validate the operational aspects ofthe new dimensions. Another possible research would be to change the sample, to surveysole proprietors or taxpayers doing own business and then make a comparative studybetween salaried and non salaried to find out if there are any significant differencebetween these groups of taxpayers’. The present study surveyed all individual taxpayers’i.e. salaried and self employed however, 75% were salaried and 25% were self employed.This is recommended because salaried taxpayers are subjected to monthly Scheduler TaxDeduction (STD) and is mandatory for employers to comply. However, for self employedthey either pay bimonthly or pay in full before the deadline expires, 30 th June. Therefore,the differences in the schemes might show differences in perceptions of tax fairness andtheir tax reporting behaviour.And suggestions to IRB, educating the public must be considered crucial. Only throughtax education concepts of taxation and tax knowledge can be imparted. Furthermore,taxpayers’ need more information about their tax obligations and their role in promotingthe growth of the economy of the country and the well being of its citizens. The taxeducation can be a tool to motivate voluntary compliance by taxpayers’. In the context ofreaching to the society at large, the tax authority can use the electronic media as a meansto educate taxpayers’ and change their perceptions about their tax reporting behaviourand their overall perceptions of taxation in general. Public service advertisement coveringaspects of tax reporting behaviour to influence change of perceptions among taxpayers’can be aired over television. An experiment by Roberts (1994) has proven that public83

service announcements such as, television, can bring changes and improve theperceptions of fairness of the income tax system which will ultimately improvetaxpayers’ attitudes towards compliance. The IRB of Malaysia can consider introducingitself through television and will be able to reach a wider spectrum of people.Another suggestion to IRB is to conduct a large scale survey to study perception oftaxpayers covering many determinants of tax compliance including tax fairness. Resultsfrom the study will provide indication to IRB of the perceptions of taxpayers’ inparticular and the government in general to consider changes that will further enhance thetax system in Malaysia. Singh (2003) expressed dissatisfaction that there is hardly anysystematic tax compliance research carried out by tax authorities in Asian economies.5.3 Implications Of The StudyThe government cannot discharge its responsibilities well if it does not get thecooperation of its citizen to take an active part in sharing its burden and at the same timehelping to instill equity and redistribute the wealth among the nation. In the context ofMalaysia the IRB has made it very clear in its mission that it will collect only fair andreasonable taxes that is due from the taxpayers’. Consistent with prior research ontaxpayers’ attitudes and the compliance behaviour evidence is found that fairness isrelevant and prevalent in tax compliant behaviour. As implied by Christensen, et al.(1994) the implications of these results are that tax authority or tax policy makers canchange some perceptions on tax fairness but not all. The government may collaborate84

with IRB to increase its efforts and methods to reach out to every citizen through themedia, television. Building a positive perception on the tax system of the country willnaturally increase compliance and prevent underreporting and tax cheating attitudes.Taxpayers’ perception on the tax system is so important because fairness of the taxsystem will instill compliant behaviour amongst taxpayers’. Understanding taxpayers’motivation and developing tax policies and strategies that can influence compliance willbring more revenue and less administrative cost on the tax authority besides creating astronger bridge between the government, tax authority and the public.85

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