Power and Trust as Determinants of Tax Compliance Costs

Abstract

Compliance with tax laws by taxpayers is fundamental to the collection of tax revenue. Taxpayers can either comply voluntarily or they can be forced by a revenue authority to comply. Revenue authorities can thus embrace a customer service-oriented approach (based on trust) or an enforcement approach (using power) to ensure taxpayer compliance. Using a combination of the Slippery Slope Framework (SSF) and a Structural Equation Modelling (SEM) analysis, the effect of power by and/or trust in the South African Revenue Service (SARS) on small, medium and micro enterprises’ (SMMEs’) tax compliance costs is investigated. It was established that while the use of power has no statistically significant impact on tax compliance costs, trust significantly reduces SMMEs’ tax compliance costs. This finding may be important to all revenue authorities who wish to ensure improved taxpayer compliance.