1.1 Background to the Study

The subject of taxation has received considerable intellectual and theoretical attention in the literature. Taxation is one of the most volatile subjects in governance both in the developing and developed nations. Tax refers to a “compulsory levy by a public authority for which nothing is received directly in return” (James and Nobes, 1992). According to Nightingale (2001), “a tax is compulsory contribution, imposed by government, and while taxpayers may receive nothing identifiable in return for their contribution, they nevertheless have the benefit of living in a relatively educated, healthy and safe society”. She further explains that taxation is part of the price to be paid for an organized society and identified six reasons for taxation: provision of public goods, redistribution of income and wealth, promotion of social and economic welfare, economic stability and harmonization and regulation. In other words, a tax is an imposed levy by the government against the income, profits, property, wealth and consumption of individuals and corporate organizations to enable government obtain the required revenue to provide basic amenities, security and well-being of the citizens.

First detailed information about taxation can be found in Ancient Egypt (Webber and Wildavsky, 1986). The Pharaohs appointed tax collectors (called scribes) and paid them high salaries to reduce the incentives to enrich themselves. Furthermore, scribes working in the field were controlled by a group of special scribes from head office. Today, corruption of the tax agency is still a problem, especially in developing countries According to the traditional model of tax compliance by Allingham and Sandmo (1972), taxpayers choose how much income to report on their tax returns by solving a standard expected utility-maximization problem that trade o the tax savings from under reporting true income against the risk of audit and penalties for detected non compliance. In this framework, both the threat of penalty and audit makes people pay their taxes (Allingham and Sandmo, 1972). Some preliminary tax morale research was conducted during the 1960s by the Cologne School of Psychology, that tried to narrow the bridge between economics and social psychology by emphasizing that economic phenomena should not only be analyzed from the traditional neoclassical point of view but also from social psychology perspective. In particular, they saw tax morale as an important and integral attitude that was related to tax noncompliance. Tax morale is defined as the “intrinsic motivation to pay taxes”.

Torgler (2002) and Fred (2003) stress its relevance to understand the high observed level of compliance. Three key factors are important in understanding tax morale: they are, moral rule and sentiments, fairness and the relationship between taxpayer and government. According to James, Murphy and Reinhart (2005), tax laws cannot cope with every eventuality and has to be supplemented with administrative procedures and decisions and just as importantly, in order to work, it has to have a reasonable degree of willing compliance on the part of the taxpayers themselves. Therefore, a more appropriate definition of compliance could include the degree of willingness with tax laws and administration that can be achieved without the immediate threat or actual application of enforcement activity. Tax compliance may be viewed in terms of tax avoidance and evasion. The two are conventionally distinguished in terms of legality, with avoidance referring to legal measures to reduce tax liability and evasion as illegal measures. Compliance might therefore be better defined in terms of compliance with the spirit as well as the letter of the law (James, Murphy and Reinhart 2005).

Nigeria is governed by a Federal system and the government’s fiscal power is based on a three-tier tax structure divided among the Federal, State, and Local governments, each of which has different tax jurisdictions. The Nigerian tax system is lopsided. The federal government controls all the major sources of revenue like import and excise duties, mining rents and royalties, petroleum profit tax and company income tax, value added tax among other revenue sources. State and local government taxes are minimal, hence, this limits their ability to raise independent revenue and so they depend solely on allocation from Federation Account. In 1992, the government introduced self assessment scheme, under which a taxpayer is expected to fill a tax assessment form to determine his taxable income. Here, the intrinsic motivation to pay tax (that is, tax morale) will determine the level of compliance with reporting requirements. Which means that the taxpayer files all required tax returns at the proper time and that the returns accurately report tax liability in accordance with the law.

The advent of democratic rule in 1999 has put greater pressure on the three-tier of governments to generate enough revenue and meet electoral promises in terms of provision of basic necessities and infrastructure for the economic empowerment of the people. To achieve these goals taxpayers must pay their taxes willingly as and when due. In other words, a high tax morale is required from the taxpayer in order to achieve a high degree of tax compliance. Webley et al. (1991), detect a positive relationship between government performance and tax compliance But in spite of all the researches that have been done, more empirical work is needed to confirm the existence of these relationships and to measure the strength of their influence on tax compliance. This is particularly so, since tax compliance is of obvious importance for most countries. This work aims to study tax compliance in Nigeria, thereby supplementing empirical research on this important international problem. This is therefore an opportunity to take a stroll through theoretical and empirical findings in the tax morale literature, focusing on Personal Income tax morale.

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