Factors Influencing taxpayers' compliance with the tax system: An empirical study in Mekelle City, Ethiopia

This paper attempted to reveal determinants of taxpayers' compliance with the tax system. Nine tax compliance determinants were examined; the examined tax compliance determinants were: probability of being audited; perception of government spending; perception of equity and fairness; penalty, financial constraint; changes to ciment government policies; referral group; the role of the tax authority; and tax knowledge. The study used a cross-sectional survey method of research design. Given the scaled ranking information of the dependent variable (tax compliance), an ordered probit was applied to examine determinants of tax compliance in Mekelle city, Ethiopia. The study results from the survey conducted in Mekelle using 102 respondents, indicate that tax compliance was influenced by the probability of being audited, financial constraints, and changes in government policy. The results of this study can inform policymakers how the determinants influence tax compliance behaviour. The analysis focuses on tax compliance and its determinants and is therefore subject to an underlying assumption of tax payers' understanding of tax and other potentially relevant information. The results of this study also provide specific insights and allow policy makers to gain a better understanding of the key variables that are significantly associated with tax compliance and enable them to implement suitable strategies to minimise potentially damaging factors, and should also allow them to improve their government's tax revenue collections. Tax collection is evidenced to be low in the country; hence, studying the factors influencing tax compliance is of enormous significance. Such a study becomes imperative given limited research so far undertaken in the area. Moreover, this study attempts to enrich the existing literature by providing a clearer picture and a holistic view of taxpayers' compliance behaviour from a developing country's perspective.