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Abstract
Widespread tax evasion evidenced by persistent public resistance to pay is seen as part of the problem of raising local government revenues in Tanzania. Dealing with the policy problem of revenue enhancement and tax evasion requires some understanding of the factors underlying the individual’s decision whether to pay or evade taxes; however, taxpayers’ views have, to a large extent, been ignored. Based on data from a citizens’ survey, this paper highlights factors impacting on tax
compliance behaviour, by examining the views of ordinary people of local government taxation.
This study shows that citizens feel they receive little in return for taxes paid. This impacts on their willingness to pay tax and contributes to eroding peoples’ trust in the (local) government’s capacity to provide the expected services. Hence, from a policy perspective it is a major challenge to provide better linkages between tax payment and service delivery. Moreover, the study shows that the ways taxes are collected can affect citizens’ attitudes towards taxation. Oppressive, uncompromising and
non-transparent approaches to collecting taxes, fees and charges may actually foster tax resistance and disrespect for the laws.
Citizens’ access to and right to information on taxes collected and how revenues are spent is seen as a necessary condition to achieve accountable, transparent and participatory governance and peoplecentred development. However, public information on tax revenues collected and financial allocations is scarce. Very few of the respondents had seen any information about local government finances. The study therefore concludes that it is imperative to establish mechanisms for improving relations between the local revenue administration and citizens. Relevant measures include improvements to the billing and accounting systems, establishing more accessible and transparent payment facilities, and strengthening the capacity to follow up cases of non-payment through fair and reasonable tax enforcement.
Executive summary
Introduction
Widespread tax evasion reflected in persistent public resistance to pay is seen as an important part of the problem of raising local government revenues in Tanzania. Dealing with the policy problem of revenue enhancement and tax evasion requires some understanding of the factors underlying the individual’s decision whether to pay or evade taxes. However, taxpayers’ views have to a large extent been ignored in this policy debate. Based on data from a citizens’ survey, this paper aims to shed light on factors impacting on tax compliance behaviour, by examining the views of ordinary people on local government taxation.
Understanding Tax Compliance
Chapter 2 provides an analytical and conceptual framework to analysing tax compliance. The relationship between a taxpayer and the local government includes at least three elements.
First, there is an element of fiscal exchange, as payment of taxes and the provision of services can be interpreted as a contractual relationship between taxpayers and the local government. Hence, individuals may pay taxes because they value the goods provided by the government, recognising that their payments are necessary both to help finance the goods and services and to make
others contribute. Accordingly, citizens’ willingness to pay taxes voluntarily depends on the local government’s capacity to provide services.
Second, there is an element of coercion, as represented by the enforcement activities of tax collectors and the penalties imposed on those detected for non-payment. The credibility or trustworthiness of the revenue administration’s sanctions against defaulters is important in this context. At the same time, agencies concerned with trust aim to minimise the use of oppressive and harsh enforcement techniques on trustworthy citizens and ensure that enforcement procedures are perceived by the broader public as reasonable, fair and in accordance with the accepted standards of society.
A third element is the impact of social influences and norms on the taxpayer’s compliance behaviour. Compliance behaviour and attitudes towards the tax system may thus be affected by the behaviour of an individual’s reference group such as relatives, neighbours, friends and political associates. Consequently, if a taxpayer knows many people important to him/her who do not pay taxes, then his/her commitment to comply will be weaker. On the other hand, individuals can be dissuaded from engaging in evasion out of fear of the social sanctions incurred should their action be discovered and revealed publicly.
The Survey
The survey was conducted in October 2003 and comprised 1,260 respondents in Bagamoyo District Council (DC), Ilala Municipal Council (MC), Iringa DC, Kilosa DC, Moshi DC and Mwanza City Council. The survey included respondents from 42 villages/mtaas, all located in different wards. Based on the theoretical framework outlined in chapter 2, the survey included questions on citizens’ views on:
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taxation and tax evasion;
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who pays and why;
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service delivery;
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major problems in tax collection;
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who is to blame for poor tax collection; and
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measures required to improve revenue collection.
The respondents were grouped according to socioeconomic characteristics such as age, gender, size of household, education, occupation etc. Almost 60% of the respondents were self-employed in agriculture. Agriculture was also the principal source of income in the respondents’ households, followed by self-employment in other sectors, including trade and commerce (28%). Only 2%
were public sector employees. Further details on the sample include: 53% of the respondents were men and 47% women; 71% of all respondents were married; almost 60% of the respondents were Christians and 40% Muslims. 28% of the respondents were between 18-29 years of age, 47% between 30-49 years, and 25% 50 years and above. Almost 70% of the respondents had only primary school education, 11% secondary school, 2% college or university education, while about 3% had vocational/adult education.
Results
Chapter 4 first gives a description of the characteristics of those who pay local government taxes, fees and charges, and then proceeds to present perceptions on why (some) people pay.
Who pays?
In the total sample, almost 59% of the respondents report paying taxes and/or fees. The most frequently cited tax types are property tax, water charges and non-fee school contributions. Reported tax payments, however, may differ from actual payments. For instance, it is not uncommon that some people overstate their compliance. But the aggregate compliance rate in the sample of almost 60% does not diverge substantially from findings of previous studies.
There are substantial differences between the six case councils with respect to tax payment. While almost 64% report having paid taxes in Ilala MC, only 53% gave this answer in Bagamoyo DC. This difference is not surprising given the rural - urban divide with respect to the coverage of taxes, fees and charges. Age and education also matter. Hence, a larger share of the middle-aged group (30-49 years of age) claims to pay taxes. Admitted tax compliance also increases with the level of education. However, the survey data show only minor differences between male and female respondents with respect to declared tax payment. Neither do different religious beliefs matter with respect to claimed tax compliance.
Why People Pay
When asked why people pay taxes and fees, only 23% of the respondents said that it was because people anticipated public services, and less than 10% believed that it was because people felt obligations towards the government. The majority of the respondents said people paid taxes because they ‘wanted to avoid disturbances’ (46% of the total sample). This response indicates that the revenue collection regime is considered to be harsh and unpleasant by many respondents, though we observed substantial differences among the case councils in this respect.
Problems of Tax Collection
The most serious problem hampering tax collection, according to citizens’ perceptions, is that taxes collected are not spent on public services. More than 58% of the respondents in the sample had this view. Thereafter follow ‘too high taxes/fees’ (48%) and ‘dishonest collectors’ (46%) as the second and third major problems. This reflects a deep distrust among citizens on the local governments’ ability or motivation to provide services. The perception of dishonest collectors adds to this distrust.
Tax Compliance and Service Delivery
Only 9% of all the respondents agree with the statement that most of the tax revenues collected in the area where they live are used to provide services. Moreover, the majority of all respondents (51%) agree that people should refuse to pay taxes until services improve. As many as 73% of all respondents say they are willing to pay more taxes if public services are improved.
Almost 75% of the respondents agree that people should contribute to improved services through self-help activities, though there are substantial differences between the councils in this respect. While more than 90% of the respondents in Kilosa DC and Iringa DC are positive towards self-help in improving service delivery, only 56% of the respondents in Ilala MC are in favour of the self-help approach.
Citizens’ satisfaction or dissatisfaction with service provision varies substantially between individual public services. As many as 70% of the respondents say they are satisfied with primary schools, while only 22% say they are satisfied with the water supply and road maintenance. Law and order (19%) and the market place (13%) also score low. People are least satisfied with garbage collection (7%) and agricultural extension services (8%). Again, there are significant differences between the councils.
Who Are to Blame for Poor Tax Collection
Tax collectors and council employees are those most frequently blamed for poor tax collection by the respondents. The lack of trust in tax collectors has been documented in previous studies. In particular, the collection of the development levy often led to conflicts and tensions between collectors and citizens. Since this survey was carried out only a few months after the abolition of development levy in 2003, citizens’ perceptions of tax collectors may still reflect their views based on their experiences
with development levy collection. As many as 27% of all respondents think that misuse of funds is unavoidable, though there are large variations across councils. While only 11% of respondents in Iringa DC see misuse as unavoidable, as many as 41% percent in Moshi DC hold this view.
Citizens’ Views on How to Improve the System
When asked what actions would reduce the misuse of tax revenue, more than 40% of the respondents say it would not help to report this to the village authorities, the ward and council offices, and the police. The most frequent reason given for this attitude is “all civil servants are corrupt and they protect each other”. However, almost 64% of the respondents think that reporting the misuse of tax revenue to a journalist would help reduce this form of corruption. When it comes to why so few people take action and report the misuse of revenues collected, 21% of the respondents say that it is because they are scared of repercussions, and 15% say that such actions will not have any effect anyway.
How can the use of tax revenues be improved? The measures most favoured by citizens are stronger punishment of government employees (83%) and politicians (almost 80%), followed by more information to the public on the allocation of tax revenue (78%) and revenue collection (74%). These views cross-cut all the six case councils. From a citizen’s perspective the measures suggested for improving the use of tax revenues can all be interpreted as trust-enhancing devices. This is in line with recent research which concludes that one of the factors that determine taxpayers’ compliance is whether citizens perceive the local government to be trustworthy and acting in their interest.
Concluding Remarks
The survey data show that citizens feel they get little in return for taxes paid. This perception impacts on their willingness to pay and contributes to eroding peoples’ trust in the local government’s capacity to provide the expected services. The majority of the respondents said that “they would be willing to pay more taxes if public services were improved”. Hence, from a policy perspective it is a major challenge to provide better linkages between tax compliance and service delivery.
The survey data point to the misuse of tax revenues by council staff (particularly by tax collectors) and councillors as a major problem. Hence, stronger punishment of council staff and councillors whose mismanagement is detected is perceived to be a key measure for improving the present system. Citizens’ access to and right to information on taxes collected and how revenues are spent is seen as a necessary condition to achieve accountable, transparent and participatory governance and people-centred development. However, information to the public on tax revenues collected, financial allocations and how to report corruption are in scarce supply, according to the survey data. Very few of the respondents have seen posted any information about local government finances. To build trust between citizens and the council, information to the public is crucial.
It is also imperative to establish mechanisms for improving relations between the local revenue administration and citizens. Relevant measures include improvements to the billing and accounting systems, establishing more accessible and efficient payment facilities, and strengthening the capacity to follow up cases of non-payment through fair and reasonable enforcement. The problems of non-payment should therefore be attacked on several fronts, including service delivery, better administration and information schemes, and community involvement. Furthermore, citizens’ involvement in identifying problems and setting priorities may motivate a greater sense of community involvement. Initially, it is advisable to link payment directly to visible improvements in services.
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