Sustainable tax revenue growth is the primary concern of policy makers in formulating a country’s fiscal strategy. This concern becomes more serious for countries facing a budget deficit. Major international organizations call on governments to strengthen and increase the efficiency of their tax systems in order to generate domestic resources to achieve the Sustainable Development Goals (SDGs) and promote inclusive economic growth. Tax experts have asserted that an effective tax system is the foundation of sustainable development. For taxation to be used as a means of financing sustainable development, it is necessary to inculcate a culture of sustainable tax compliance in the citizens of a state. Tax compliance is defined as the ability and willingness of taxpayers to comply with tax laws by reporting correct income with payment of the correct amount of tax within the prescribed time frame. Tax compliance is the extent to which a taxpayer complies with tax rules and regulations. While voluntary tax compliance is a taxpayer’s willingness to comply with tax laws, especially without any enforcement action taken by the tax administration.
Around the world, revenue authorities face challenges in financial management due to a narrow tax base that results in poor performance in collecting tax revenue. Tax revenue collection depends primarily on taxpayer compliance. There is a direct relationship between the level of taxpayer compliance and the government’s collection of tax revenue. The higher the degree of compliance with tax laws by taxpayers, the higher the tax collection will be. In contrast, non-compliance is essentially an attitudinal tendency of a taxpayer that can lead to tax behavior in the form of tax avoidance or tax evasion. To promote tax culture, it is necessary to discourage the behavioral tendencies of taxpayers towards tax evasion or tax evasion. According to the psychological theory of attribution, behavior is influenced by internal and external factors. Behavior influenced by internal factors is believed to be under an individual’s personal control. Behavior is also influenced by the external environment which comes under external factors. Therefore, psychological biases due to internal and external factors must be reduced for an individual to comply with state laws. In this context, the tax administration of various countries are increasingly using different techniques of economic psychology to analyze the behavior of citizens in order to improve tax compliance. To this end, behavioral economics helps tax administration understand the determinants of taxpayer compliance and improve their engagement in tax matters.
Recent years have seen the popular trend of using “nudges” in an attempt to improve individual behavior. Nudge techniques based on behavioral insights are widely used in the field of taxation to encourage correct tax behavior. The behavioral approach is based on the idea that low-cost interventions are carried out with the aim of encouraging people to make better choices for themselves and for society. For example, if the objective of a particular tax is to discourage certain behaviors such as tobacco use or the consumption of junk food for health reasons, then compliance will lead to a change in the behavior of the whole society. Likewise, a small change in behavior can lead to significant additional income.
The carbon tax is another important example to control the negative tendencies of society by realizing the dangerous consequences of the emission of toxic gases by industries and vehicles on the road. This tax encourages citizens to use energy-saving techniques. A carbon tax is a kind of tax on pollution with the aim of protecting the environment. This tax aims to make more visible the hidden social cost of carbon emissions, which is otherwise felt indirectly, such as global warming. Changing the behavior of state citizens requires constant pursuit by tax authorities involving behavioral insights to improve compliance behavior. Recently, an OECD report highlighted the importance of behavioral insights for better tax administration. The report includes strategic considerations as well as various interventions employed by behavioral scientists to improve tax compliance.
Sustained taxpayer compliance requires an environment where taxpayers have appropriate knowledge of their roles and responsibilities. Several empirical studies have confirmed that tax education has positive effects on tax revenue growth. Taxpayer education includes initiatives to create a culture of tax compliance by taxpayers who teach various aspects of taxation such as tax obligations, the importance of meeting tax deadlines, etc. tax compliance. Tax literacy helps people learn about tax provisions that will legitimately reduce their tax liability or avoid late filing that could result in fines or penalties. The role of the electronic media, including television and radio, is very important in the dissemination of tax information programs. Seminars in schools and colleges also play a remarkable role in edifying the younger generations on the importance of tax revenues for the sustainable development of the country. More outreach on radio, television, and other mass media can lead to greater taxpayer cooperation by affecting tax morality and tax compliance. Door-to-door tax education and information leads not only to better tax compliance, but also to a broader tax base.
In a word, it is imperative on the part of the state apparatus to work for the generalization of the social acceptance of the tax system without which the system cannot be applied in a holistic way. To this end, behavioral insights are very important to study to bring about changes in the behavior of taxpayers. It is necessary to make people understand that they have to change their behavior in order to obtain better results for themselves and for society. The type of faith must be inculcated that tax is an obligation to be paid, so that the poor can obtain benefits and that misrepresentation of tax liability is a crime. Taxpayer compliance behavior can be corrected if analyzed through the lenses of attribution theory, equity theory, social exchange theory, intrinsic motivation theory and the theory of optimal taxation. Taxpayer education is an important factor in creating a taxpayer culture. A nationwide education and information campaign will not only improve the tax compliance of existing taxpayers, but will also help build the future generation of taxpayers with an appropriate tax mindset.—-Dr. Faisal Asghar (the author is a doctor of economics)