The perception of the effectiveness of carrots in comparison to sticks on tax compliance of small and medium-sized enterprises

Abstract

Background: Tax authorities have traditionally focused on deterrence measures such as audits, penalties, and interest to enforce tax compliance. The focus on deterrence measures has come under scrutiny as researchers found that the level of tax compliance by taxpayers indicates that there may be supplementary factors in addition to deterrence measures to encourage tax compliance. Over time researchers have found that social norms, nudges, and morality impact a taxpayer’s tax compliance decision. In this study, the perceptions of the taxpayers of small and medium-sized enterprises (SMEs) in South Africa will be examined on what they consider as likely to impact their tax compliance decision between sticks (deterrence measures) and carrots (measures aimed at encouraging voluntary tax compliance). Main purpose of study: In this study, the perceived effectiveness of carrots in comparison to sticks on tax compliance of SMEs in South Africa is examined. Method: A quantitative research method was adopted to analyse primary data and respond to the research question. Descriptive and inferential statistics were evaluated to respond to the set research objectives. Results: The results of this study have shown that SME taxpayers perceive carrots as mostly likely to impact their tax compliance decision in comparison to sticks. Conclusions: The results of this study align to existing literature which have shown that, in addition to deterrence measures, other factors impact a taxpayer’s tax compliance decision. The results also show that deterrence measures are perceived to be less effective in comparison to carrots on tax compliance of SMEs in South Africa. This challenges tax authorities to reflect on their methods of encouraging taxpayer compliance.