The perception of the effectiveness of carrots in comparison to sticks on tax compliance of individuals

Abstract

Background: The majority of tax revenue is collected by the revenue authorities by virtue of personal income tax. Therefore, it is imperative to consider the perceived effectiveness of carrots in comparison to sticks on the tax compliance of individuals. In a South African context, enforcement strategies and measures that seek to encourage voluntary tax compliance are applied in order to improve tax compliance amongst individual taxpayers. Therefore, examining the impact of carrots (measures that seek to encourage voluntary tax compliance) in comparison to sticks (enforcement strategies) on tax compliance is imperative, in order to determine the most effective strategies that could be applied by tax authorities in improving tax compliance. Main purpose of study: To determine individual taxpayers’ perceived effectiveness of carrots in comparison to sticks on tax compliance, and to ascertain factors that are perceived as likely to encourage tax compliance, as well as factors perceived as likely to discourage tax compliance. Method: A quantitative research design was applied. An online questionnaire was distributed to participants in order to collect primary data. Thereafter descriptive and inferential statistics were calculated in order to determine whether the research objectives had been met. Results: The results indicated that a combination of carrots and sticks leads to better tax compliance amongst individual taxpayers. The majority of the participants indicated that the impact of a carrot will be greater if the benefit obtained can be quantified. The importance of the fiscal exchange relationship between taxpayers and the government was emphasised, as the results show that unhappiness with public goods or services provided by government is perceived as likely to discourage tax compliance amongst individual taxpayers. Conclusions: SARS mainly applies enforcement strategies to encourage tax compliance. However, although SARS already applies some carrot-based strategies, they should consider additional carrot-based strategies to encourage tax compliance amongst taxpayers.