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Abstract

This paper examines whether tax knowledge, tax fairness and trust affect voluntary tax compliance among small and medium enterprises (SMEs). Given the growing budget deficits and debt levels of developing economies, we contend that an understanding of the factors associated with voluntary tax compliance among SMEs could enhance tax revenue mobilization. Although the majority of businesses are SMEs, questions about their tax compliance have become topical among stakeholders due to perceived low levels of compliance, hence, an investigation into the factors underlying their tax compliance behavior is critical for stakeholders, particularly governments and tax authorities. We used a survey-based approach to sample 341 SMEs operating within Ghana’s oil city of Secondi-Takoradi. We employed the structural equation modeling (SEM) technique to analyze the retrieved data. Generally, our empirical results indicate that social factors and behavioral motivations are key determinants of voluntary tax compliance among SMEs in Ghana. Specifically, our results suggest that SMEs’ perception of tax fairness, knowledge about the tax system, and trust in government are significant predictors of voluntary tax compliance. Additionally, we find a significant mediating role of tax fairness in the relationship between tax knowledge and voluntary tax compliance. As governments seek to raise tax revenues and manage public debt, our results provide important insights into social and behavioral factors that could aid in enhancing tax compliance.

Plain Language Summary

Governments across the globe especially those in the developing world are confronted with growing budget deficits and debt levels. This has been attributed to low tax revenue mobilization particularly non-compliance with tax laws by those operating in the informal sector. As a result, we sought to identify the factors associated with voluntary tax compliance since an understanding of these factors can assist the government to address the problem of non-compliance. We surveyed small and medium enterprises and analyzed our data using structural equation modeling. Generally, our results indicate that social factors and behavioral motivations are key determinants of voluntary tax compliance among SMEs in Ghana. Particularly, SMEs’ perception of tax fairness, knowledge about the tax system, and trust in government are significant predictors of voluntary tax compliance. As governments seek to raise tax revenues and manage public debt, our results provide important insights into social and behavioral factors that could aid in enhancing tax compliance.

Keywords

tax fairness tax knowledge voluntary tax compliance Ghana SMEs

Introduction

Voluntary tax compliance is critical for the efficient mobilization of tax revenues, and thus many governments design their tax systems to enhance voluntary compliance (Jimenez & Iyer, 2016). Notwithstanding this, the antecedents of voluntary tax compliance, especially within the developing world, are not clearly documented. Given that these economies are largely dominated by the informal sector, voluntary tax compliance especially among the small and medium enterprises is vital in the mobilization of tax revenues. Tax revenue mobilization is the process of collecting taxes from individuals, businesses, and other organizations in order to fund government activities. In developing countries like Ghana, the ability of the government to mobilize adequate tax revenue is important to halt the increasing budget deficit and ballooning public debt. The realization that increased tax revenue can improve the living standards of people and help deal with increasing deficit financing has brought to the fore the need to improve tax compliance (Ritsatos, 2014). Improved tax revenue does not only promote economic development but also helps finance critical infrastructure to support business growth and development (Ibrahim et al., 2015). In addition, the ability and capacity of every sovereign nation to enhance the welfare and security of its citizens hinges on its ability to raise enough tax revenue (Armah-Attoh & Awal, 2013). Thus, all governments in both developed and developing countries must improve the mobilization of tax resources from all economic agents to improve the quality of life of the citizenry (Gohou & Soumaré, 2012). Unfortunately, despite the important contribution of tax revenue to the socio-economic development of countries, most developing economies continue to record insufficient tax revenue to support their budgets and to build critical infrastructure for accelerated development (Okunogbe & Santoro, 2023; Terkper, 2003; Umar & Masud, 2020). The inability of many governments, especially those in developing countries, to mobilize adequate tax revenue for development has rekindled the debate regarding the best approach to comprehensively address the problem of non-tax compliance in developing countries.

Over the years, Ghana as a developing economy has been struggling to mobilize enough tax revenues to enhance its development. Compared to other African countries, Ghana has one of the lowest tax-to-GDP ratio on the continent. For example, Ghana’s average tax-to-GDP ratio of 13.4% is lower than the average tax-to-GDP ratio of 16.0% recorded by the African continent (OECD, 2022).

In order to improve Ghana’s tax revenue mobilization, all economic agents except those exempted by the tax laws are expected to contribute their quota to the tax basket. Notably, the small and medium-sized enterprises (SMEs) which constitute a greater percentage of businesses in Ghana are expected to make a significant contribution to job creation, tax revenues, and economic prosperity. For instance, SMEs dominate the business sector as it accounts for 92% of all registered firms, 85% of manufacturing employment, and 70% of the country’s GDP (Abor & Quartey, 2010). Given the significant presence of SMEs in Ghana, one would expect the SME sector to contribute massively to the tax revenue of the economy. Unfortunately, this is not entirely the case since non-compliance among SMEs remains a major issue of concern (Ababio & Gnonsio Mangueye, 2021; Ahmed & Braithwaite, 2005; Carsamer & Abbam, 2023; Peprah et al., 2022).

In relation to the taxation of SMEs in Ghana, the pass-through taxation concept is applied where the profits from the SME is taxed in the hands of the owner and not at the entity level. Generally, this type of taxation appears relatively complex given that profits must first be estimated at the entity level and then taxed in the hands of the SME owner which presents an opportunity for non-compliance. Therefore, an understanding of SMEs’ tax compliance behavior is useful for governments seeking to increase tax revenue. The lack of compliance may be viewed from two different angles. The first is a complete failure on the part of these entities to file tax returns as they fall due, and the second is the failure to accurately report all taxes owed.

The focus on SMEs in this study is premised on several issues. Whilst governments’ efforts to increase tax revenue are yielding some results, compliance from the SME sector is still notably low (Ababio & Gnonsio Mangueye, 2021). A large proportion of Ghana’s tax revenue comes from indirect taxes. Only a few Ghanaians pay income taxes, hence the need to pay attention to direct taxes in government’s revenue mobilization efforts. It is relatively easier to mobilize income taxes from the formal sector (mostly involving public sector employees and employees in the corporate sector). Unfortunately, majority of Ghanaians earn their incomes from business activities outside the formal sector. These businesses though small and informal are the biggest contributors to the employment and livelihoods of the majority of Ghanaians. Hence, the prospect of increasing tax revenue can become a reality if issues of non-compliance in tax payment within the SME sector are addressed. Thus, it is important that factors associated with non-compliance within the SME sector are carefully examined to obtain important insights that can contribute immensely to the government’s policy on revenue mobilization

The low levels of tax compliance on the part of SMEs despite consistent efforts to enforce compliance has brought to the fore the need to reexamine the existing enforcement regime of deterrence and tax audit. According to Machogu (2013), whereas deterrence and tax audit are important factors to ensure compliance, other factors that lead to voluntary tax compliance such as perception of fairness of the tax laws, trust in the tax authorities, and societal norms could be important determinants of tax compliance. Voluntary tax compliance is the inclination on the part of the individual and business entities to return their taxes willingly without being compelled to do so. Whereas it is important to promote voluntary tax compliance, there is the need to first identify the factors that promote or inhibit voluntary tax compliance. According to Jimenez and Iyer (2016), policymakers, tax practitioners, and governments must understand the factors that influence the tax compliance of individuals and businesses to develop the right policy to promote tax compliance. Against this backdrop, this paper seeks to examine the main factors affecting voluntary tax compliance among SMEs in Ghana. The study focuses on how tax fairness, trust in government, and tax knowledge affect tax compliance among SMEs in Ghana.

This paper is different from other studies in four distinct ways. First, various studies have examined the determinants of tax compliance (see, Azmi et al., 2016; Faizal & Palil, 2015; Gobena & Van Dijke, 2016; Jimenez & Iyer, 2016) but the majority of these studies tend to overlook voluntary tax compliance. Additionally, some prior studies (e.g., Ababio & Gnonsio Mangueye, 2021) do not differentiate between voluntary tax compliance and mandatory tax compliance. Given the weak enforcement regimes within developing countries, such distinctions are important because the subject of voluntary tax compliance is critical since state agencies may not be able to ensure mandatory tax compliance through tax audits and field visits. Simply put, enforcement of tax laws by state agencies is expensive as such an understanding of the factors associated with voluntary tax compliance could assist governments to enhance revenue mobilization whilst minimizing the associated cost. Secondly, voluntary tax compliance studies among SMEs in Ghana such as Carsamer and Abbam (2023) examined whether religiosity impacts SMEs’ willingness to voluntarily comply with tax laws. They contend that the two dominant religions in Ghana; Islam and Christianity teach their followers to obey state laws as part of their religious commitment. While these studies provide interesting insights into tax compliance behavior among SMEs in Ghana, the effect of other salient factors such as tax fairness and trust in government on tax compliance are unexplored. Thirdly, even though studies on tax knowledge and compliance exist, the possible mediation variables in this relationship have not been investigated. This paper thus contributes to the literature by being one of the first to investigate the transmission channel through which tax knowledge and trust in government influence tax compliance among SMEs in Ghana. We test the mediation using one of Adam Smith’s proposed cannons of taxation namely tax fairness. Finally, the paper contributes to practice by providing evidence to support the design of taxes that will conform to one of the critical canons of taxation. Furthermore, the evidence here will provide the basis for various stakeholders to demand a behavioral change by government officials and tax authorities to engender public confidence in their ability to properly manage state resources. Holding the government accountable on the basis of the findings here can promote transparency, enhance trust and reduce tax non-compliance among SMEs.

The rest of the paper is organized as follows: Section two provides a brief but comprehensive review of existing literature on tax compliance and hypothesis formulation. Section three of the paper discusses the sources of data and analysis techniques adopted. Section four presents the results and discussion of the findings. Finally, section five provides the conclusion and policy implications of the findings.

Literature Review and Hypothesis Formulation

The importance of taxes for the socio-economic development of nations has piqued the interest of many researchers across the globe. As a result, different theoretical perspectives have been applied to investigate various questions about tax compliance. In this study, we apply the slippery slope theory as a framework to assess the determinants of voluntary tax compliance. Kirchler et al. (2008) introduced the slippery slope theory (SST) as a theoretical foundation for gaining insights into the tax compliance behavior of individuals. The SST has two important assumptions about tax compliance. The first dimension focuses on the reduction of tax evasion and improvement in tax compliance through the application of fines and audits. The second approach, on the other hand, focuses on building and improving the relationship between taxpayers and tax authorities, which translates into compliance (Kirchler et al., 2008). Over the years, studies on tax compliance have focused on the use of tax audits and the economics-of-crime approach (Alm et al., 1995). However, Alm et al. (1995). have opined that a more holistic approach to understanding tax compliance among individuals and businesses needs to be adopted. The authors argue that more attention should be paid to behavioral and motivational factors that affect the compliance intentions of households and businesses. Consistent with Inasius et al. (2020) and several other prior studies, we use the theoretical perspective of the slippery slope framework to examine the role of trust and tax fairness in voluntary tax compliance.

Voluntary tax compliance has been described as the willingness of taxpayers to pay their taxes freely without any external pressures. According to James and Alley (2002), voluntary tax compliance is “the willingness of the taxpayer to act by both the ‘spirit’ and the ‘letter’ of the tax law and administration without the application of enforcement activity.” Similarly, Cuccia (1994) also conceptualized voluntary tax compliance as the willingness of taxpayers to accurately and timely file their tax returns according to the existing tax regulations without any compulsion. In this paper, we conceptualize voluntary tax compliance as the inclination on the part of individuals and business entities to willingly submit their tax returns in an accurate and timely manner without any compulsion.

Based on the slippery slope theory, the extent to which individuals or businesses are willing to voluntarily obey the tax laws and faithfully file their tax returns depends on their perception of the tax authorities in terms of fairness, trust, and knowledge of the tax system. One of the important factors that have been identified as an important determinant of voluntary tax compliance is the perceived fairness of the tax system (Kostritsa & Sittler, 2017). This claim is supported by Thomas (2012), who posits that the perception of taxpayers regarding the fairness and efficiency of the tax system is an important determinant of voluntary tax compliance. Torgler (2007) also explains that perception of the fairness of the tax system plays an important role in determining how well taxpayers comply with the tax laws. For instance, he argues that if taxpayers perceive the existing tax system and regulations as unfair, they are more likely to evade tax payments. Several studies (e.g., Azmi et al., 2016; Jimenez & Iyer, 2016; Saad, 2011) have produced consistent results on the relationship between perceived fairness of the tax regime and compliance. Specifically, these studies have shown that taxpayers’ perception of tax fairness is significantly associated with their willingness to voluntarily comply with tax laws. Based on the above, we formulate the following hypothesis:

H₁: Perception about the fairness of the tax systems has a positive influence on SME owners’ level of tax compliance.

Another important factor that has been observed as a possible determinant of voluntary tax compliance is knowledge of the tax system. Fauziati et al. (2020) describe tax knowledge as the general understanding of the tax system and its requirements within a given jurisdiction. It is posited that the more SMEs are abreast with the tax policies, the more they are likely to comply voluntarily. According to Oladipupo and Obazee (2016), tax knowledge is seen as an important contributor to voluntary tax compliance since it makes taxpayers more aware of their responsibilities. Baru (2016) also argues that the level of tax knowledge of SME owners is an essential element that determines their level of compliance with the tax system. Studies such as Loo (2006) and Chen Loo et al. (2009) have proved that tax knowledge is the most influential factor that affects tax compliance among taxpayers. This assertion is further corroborated by Ritsema et al. (2011) who also revealed that a significant number of SMEs in New Zealand voluntarily comply with the tax policies and regulations because they have adequate knowledge of the tax system. Generally, most of these studies have concluded that majority of SMEs do not comply with tax laws because they have little or no knowledge about the tax regulations.

Despite the consensus that tax knowledge has direct implications and effects on tax compliance, some studies have produced contrasting results. For instance, Bird (2013) explains that the existence of tax knowledge does not significantly lead to voluntary tax compliance. The proposition by Bird (2013) is supported by Maseko (2014), who found that there is no correlation between the level of tax knowledge of SME owners and voluntary tax compliance. It is further argued that tax knowledge may rather lead to tax avoidance and non-compliance since entrepreneurs who are abreast with the tax regulations and policies can find ways to minimize their tax obligations. Whereas there are contrasting views regarding the effect of tax knowledge on tax compliance, it is amply clear that the majority of the studies on tax knowledge and compliance have found a significant relationship between these concepts. Thus, based on the above discussion, we formulate the following hypothesis:

H₂: Tax knowledge of SME owners positively influence the level of tax compliance.

The perception of taxpayers is crucial in determining their tax compliance given that it affects people’s view of the world and their attitude toward societal demands. Thus, several studies (e.g., Christina, 2022; Güzel et al., 2019) document that taxpayers’ understanding of the tax system and their perception of the tax system significantly affect compliance by taxpayers. According to Hetherington and Husser (2012), individuals apply a simple decision rule to decide whether to support a government or not and if individuals perceive that the government can be trusted to do the right thing for the populace, they are likely to support the activities or actions of the government. Studies in the area of trust and its influence on tax compliance have observed that when there is mutual trust between the taxpayer and tax authorities, a strong symbiotic relationship is established, which goes a long way to influencing strong voluntary tax compliance. However, if there is a lack of trust between taxpayers and tax authorities, the willingness of taxpayers to support the tax authorities and by extension, the government, is significantly compromised (Rudolph, 2009). Jimenez and Iyer (2016) have also observed that trust between the taxpayer and tax authorities (government) is crucial since trust is a significant predictor of voluntary tax compliance.

The relationship between the taxpayer’s trust in government and their willingness to comply with tax laws has been highlighted by Torgler (2007) who noted that the trust taxpayers have in their government is an important determinant of their tax compliance. Rudolph (2009) also explains that when citizens lose trust in their government, they begin to challenge their tax liabilities and conclude that it is too high. Similarly, Richardson (2008) conducted a study on the relationship between trust in government and tax compliance among 47 countries and concluded that there is a positive relationship between trust in government and voluntary tax compliance. Consequently, if taxpayers see their government as not trustworthy, they will rationalize tax evasion. Based on the above discussion, we formulate the hypothesis below.

H₃: Trust in Government has a positive effect on tax compliance.

The importance of tax knowledge in fostering voluntary tax compliance has been amply illustrated in the extant literature. However, the extent to which tax knowledge could enhance voluntary tax compliance may depend on the individual or business perception of tax fairness. For instance, Chen Loo et al. (2009) posit that even though taxpayers may have ample knowledge about the tax systems and laws, they may not comply with the tax laws if they perceive the tax system as unfair. Thus, fairness perception has the potential to significantly mediate the relationship between tax knowledge and voluntary tax compliance. The relationship between trust in government and voluntary tax compliance has also been confirmed in the extant literature (Alm & Torgler, 2006; Levi & Stoker, 2000). The behavior of the taxpayer does not only depend on motives and intentions but the behavior of the government as well. According to Braithwaite and Levi (1998), if taxpayers are convinced that the government will work to promote their interest and that the tax system is fair, they are likely to consent to the tax laws and pay their taxes accordingly. Research in the area of voluntary tax compliance has observed that perceived fairness of the tax system is an important determinant of voluntary tax compliance (Damayanti et al., 2015; Kogler et al., 2013). According to Kostritsa and Sittler (2017), a positive response to tax compliance depends on how individuals perceive the fairness of the authorities. Casal et al. (2016) have also observed that a high sense of fairness experienced by individuals in how authorities treat them is correlated with higher trust for that authority and higher willingness to comply with the guidelines and regulations established by the authority. Based on the above, we formulate our fourth and final hypothesis as follows.

H_4a: Perceived fairness of the tax system mediates the relationship between tax knowledge and tax compliance.

H₅ Perceived fairness of the tax system mediates the relationship between trust in government and tax compliance.

The conceptual framework linking the various research variables is shown in Figure 1 below. The hypotheses raised above are shown in the diagram from H₁ to H_5. The first mediation role of tax fairness is shown by the H₄ and H₁ which indicate that tax knowledge influences the perception of tax fairness which then affects tax compliance. The second mediation role of tax fairness is also reflected by H₅ and H₁ which indicates that, trust in Government influences the perception of fairness which the affects tax compliance. We thus argue here that trust in Government and improved tax knowledge enhances the perception of tax fairness and subsequently affects compliance.

Figure 1.

Conceptual framework.

Methodology

Research Design

This study applies quantitative techniques to examine the relationship between tax knowledge, trust in government, tax fairness, and voluntary tax compliance among SMEs in Ghana. The study relied on a sample from a population of 1,400 registered SMEs within the Secondi-Takoradi Metropolis of Ghana. Secondi-Takoradi was deemed suitable because the metropolis has seen increased activities of SMEs as a result of the discovery of oil within the area in 2006. We followed the procedure recommended by Krejcie and Morgan (1970) in selecting a sample size of 341 for our study. We used a convenience sampling technique to choose the sample. The respondent type constitutes owners/managers of the selected SME firms.

Data and Variable Measurements

A survey approach was used to gather data from SME owners/managers within the Secondi-Takoradi Metropolis of Ghana. We distributed the structured questionnaires to the selected SME managers. We administered a total of 400 questionnaires but could retrieve only 341 completed questionnaires representing a response rate of 85.3% To encourage participation by the participants, the purpose of the study was explained, and the confidentiality of the information requested was assured. The questionnaire was made up of statements to measure each variable, which included voluntary tax compliance, perceived trust in government, tax knowledge, and fairness of tax laws. These variables were measured based on the SME manager’s perception. Apart from the demographic data, all other data is collected using questions based on a five-point Likert scale. Responses range from; 1 = strongly disagree; to 5 = strongly agree. The constructs were measured using several items. The voluntary tax compliance construct was measured using 5 items consistent with those used in Verboon and van Dijke (2007). The construct measuring trust in Government was also measured with 5 items and these items were adapted from the study by Colesca (2009).

To determine the consistency of the items within the questionnaire, a reliability test was conducted using Cronbach’s Alpha. All the values of the Cronbach’s Alpha exceeded .7 indicating internal consistency within the questionnaire (Hair et al., 2014). To determine the validity of the constructs and measurement items, two main validity tests were employed. These are discriminant validity and convergent validity. Whereas convergent validity of the constructs was measured using average variance extracted (AVE), discriminant validity was investigated using composite reliability The values obtained suggest that the constructs were good measures of what they purport to measure.

Data Estimation Techniques

Descriptive statistics and Structural Equation Modeling (SEM) techniques were applied to analyze the data. Descriptive statistics such as frequencies, means, and standard deviations were used to provide an initial description of the data set. The relationship between the variables was tested using structural equation modeling (SEM). According to Jöreskog (1970), the general model for the structural equation is made up of two parts. The first part is the structural part which seeks to link latent variables to each other using systems of simultaneous equations. The second part involves the measurement portion which connects the latent variables to the observed variables. Generally, the structural model is given by:

η = B η + Γ ξ + ζ,

(1)

Where:

$η$ is the vector measuring the endogenous variable

$B$ is the matrix of regression coefficients which relates the various latent variables

$Γ$ is the matrix of the regression coefficients which relates the endogenous variables with the exogenous variables

$ξ$ is a vector of exogenous (predictor) latent variables,

$ζ$ is a vector of describing the error term

The simultaneous equations linking the latent variables to observable variables is given as

y = Λ_{y} η + ε

(2)

and

X = Λ_{X} ξ + δ,

(3)

$Λ_{y}$ and $Λ_{X}$ respectively the factors loading of variables y and x.

$ε$ and $δ$ are vectors of uniqueness for (2) and (3) respectively.

The SEM technique was applied for two important reasons. First, SEM can simultaneously investigate the relationship between multiple variables, and since the current study seeks to examine the effect of multiple variables on voluntary tax compliance, the SEM approach is deemed appropriate. Second, SEM is appropriate in situations where latent variables are used. The SEM techniques can capture the relationship between several latent variables and the dependent variables (Jimenez & Iyer, 2016). To check the suitability of the constructs and the measurement items for the SEM analysis, factor analysis was first performed. The result of the factor analysis indicates that the measurement model was appropriate for the SEM analysis. Subsequently, correlational analysis and path analysis was conducted to examine the relationship between the variables.

Results and Discussions

Demographic Profile of Respondents

The demographic characteristics of the respondents are depicted in Table 1. Out of a total of 341 respondents, 214 (62.8%) are males, while the remaining 37.2 are females. With regards to the educational level of the respondents, the majority of the respondents (56.3%) have attained tertiary qualification; 13.2% have basic education; 13.8% have attained secondary education; and the remaining 16.7% have GCE or A-Level qualification. The result further indicates that the majority of the SMEs selected have operated for between 1 and 5 years. The result further reveals that the ownership structure of the majority of SMEs is sole proprietorship. Out of the 341 SMEs considered, 258 (75.7%) are sole proprietorships; 15.0% are partnerships; and the remaining 9.4% are family-owned.

Table 1.

Demographic Profile of Respondents (N = 341).

Variable	Classification	Frequency	Percentage
Sex	Male	214	62.8
	Female	127	37.2
Education	Basic	45	13.2
	Secondary	47	13.8
	GCE O/A Level	57	16.7
	Tertiary	192	56.3
Firm age (years)	1–5	143	41.9
	6–10	78	22.9
	11–15	47	13.7
	16 and above	74	21.7
Ownership structure	Sole proprietorship	258	75.7
	Partnership	51	15.0
	Family business	32	9.4
Number of employees	1–5	220	64.5
	6–49	121	35.5

Source. Own Survey 2019.

Descriptive Statistics and Correlation Results

The descriptive statistics of the data and Pearson’s correlation result is captured in Table 2. The mean and standard deviations are the main descriptive statistics generated. Using a Likert scale of 1 to 5, where 1 represents strong disagreement and 5, strong agreement, the mean for voluntary tax compliance (VTC) is 3.82, indicating the respondents fairly agree that they voluntarily comply with the applicable tax laws. Also, the means for tax knowledge (TKN), perceived tax fairness (PTF), and trust in government (TGV) are 3.13, 2.71, and 2.71 respectively. These values suggest that respondents are neutral with respect to their views on tax knowledge, trust in government, and tax fairness. The Standard deviations of the various constructs are relatively low, indicating that the responses do not significantly deviate from the means. When the standard deviations are small relative to the means, it is an indication that the responses are close to the mean responses (Field, 2009).

Table 2.

Descriptive Statistics and Correlation Results of Variables.

Variables	Mean	SD	1	2	3	4
1. VTC	3.82	1.49	1
2. TKN	3.12	1.31	.61**	1
3. PTF	2.71	1.42	.58**	.62**	1
4. TGV	2.76	1.44	.62**	.71**	.71**	1

p < .10; **p < .05; ***p < .01

In addition to the descriptive statistics of the study variables, Pearson’s correlation analysis was conducted to gain a preliminary understanding of the association between the variables under investigation. The result, as shown in Table 2, indicates that the majority of the variables are positively correlated with each other. The results provide an opportunity to further investigate the relationship among the variables using structural equation modeling (SEM). For instance, the correlation analysis shows a significant positive relationship between voluntary tax compliance and tax knowledge (r = .61, p < .05). This result provides initial evidence to support hypothesis 2 (H₂) which postulates that a direct relationship exists between taxpayers’ knowledge of the tax system and their level of compliance. The result from the correlation estimates further shows that the relationship between perceived fairness of the tax system and voluntary tax compliance is positive and significant (r = .57, p < .05), providing initial support for the second hypothesis, which postulates that tax fairness perceptions significantly influence compliance intentions. Similarly, a strong positive relationship between tax compliance and trust in government (r = .62, p < .05) is observed, providing initial support for the third hypothesis. The correlation result generally gives an initial assurance of a significant relationship between the independent latent variables on the dependent variables.

Factor Analysis, Reliability and Validity Tests

Principal component analysis (PCA) was conducted to determine the underlining factors. Overall, a total of four factors were extracted. Together, these factors accounted for 54.66% of the variations that were extracted. The PCA was conducted using the Varimax rotation criteria. The sampling adequacy of the data was tested using the Kaiser-Meyer-Olkin (KMO) test of sampling adequacy. A KMO of 0.763 was obtained, indicating that the sample is adequate for factor analysis to be conducted. Furthermore, the suitability of factor analysis of the data was examined using Bartlett’s Test of Sphericity. From the result obtained, it can be deduced that the data is suitable for factor analysis (χ² = 1,951; p < .000). Based on the PCA, a total of four factors were extracted. These factors together explain 69.8% of the variations. The items measuring each of the constructs also load quite well. According to Pallant (2011) factor loading of 0.5 and above is considered satisfactory. The reliability of the various items measuring each of the factors was also examined using Cronbach’s alpha. The Cronbach’s alpha is calculated as:

$\frac{N τ}{υ + (N - 1) τ}$ , where N constitutes the number of items, $τ$ is the average of inter-item covariance among the various items, and $υ$ is the average variance.

According to Nunnally (1978) and Hair et al. (2007) Cronbach’s alpha of .7 and above are considered a good measure of internal consistency. The result of the reliability test, as captured in Table 3, shows that all the Cronbach’s alphas of the items exceed .7, indicating a high level of internal consistency among the Convergent and discriminant validity of the constructs were verified using the AVE approach. The AVE is obtained by dividing the sum squared component loadings for each construct by the sum of the components loadings plus some of the error variance (Fornell & Larcker, 1981). Given the latent variable T, with items represented by X, as shown in Figure 2.

Table 3.

Confirmatory Factor Analysis.

Confirmatory factor analysis of constructs	Loadings
Voluntary Tax Compliance (VTC) (CA = 0.841; CR = 0.849; AVE = 0.767)
• Pay my tax obligation willfully without force	0.763
• Do report my correct income to the tax authority	0.876
• Submit tax return on time	0.868
• Do keep all the business documents to enable accurate determination of tax payable	0.816
Tax Knowledge (TKN) (CA = 0.725; CR = 0.745; AVE = 0.754)
• GRA constantly creates awareness about tax compliance	0.808
• GRA Educates us on how to file our taxes	0.849
• I have an adequate understanding of the taxation process	0.752
Perceived Fairness of Tax Law (FTF) (CA = 0.830; CR = 0.836; AVE = 0.791)
• I believe the tax system and laws are fair	0.745
• How the tax system is distributed across taxpayers is fair	0.798
• The tax burden I get is fair given the expenditure on social services are very high	0.760
Taxpayer trust in government (TGV) (CA = 0.781; CR = 0.719; AVE = 0.710)
• GRA officials are trustworthy	0.721
• I trust that governmental institutions act upon our interests	0.769
• I trust that GRA officials are transparent in whatever they do	0.847

Figure 2.

Latent variables and their measurements.

The AVE is calculated as follows:

$AVE = \frac{\sum_{i = 1}^{k} {λ^{2}}_{i}}{\sum_{i = 1}^{k} {λ^{2}}_{i} + \sum_{i = 1}^{k} Var (e_{i})}$ , where k is the number of items on a particular construct, $λ_{i}$ is the factor loading of item i, and $Var (e_{i})$ is the variance of the error terms associated with each of the items, i. According to Fornell and Larcker (1981), when the AVE is 0.5 and above, it signifies good convergent/discriminant validity. A good convergent/discriminant validity indicates the amount of variance captured by the construct is far higher than the amount of variance resulting from measurement error. Again, a look at the result obtained in Table 3 shows that all the AVE are above 0.5, indicating adequate levels of convergent validity. Also, the composite reliability of the constructs was measured using the formulas by Netemeyer et al. (2003), which is given as:

CR = \frac{{(\sum_{i = 1}^{k} λ_{i})}^{2}}{{(\sum_{i = 1}^{k} λ_{i})}^{2} + \sum_{i = 1}^{k} Var (e_{i})},

Where:

k is the number of items on a particular construct,

$λ_{i}$ is the factor loading of item i;

$Var (e_{i})$ is the variance of the error terms associated with each of the items, i

In addition to the validation of the measurement model through the use of reliability and validity tests, the fitness of the structural model was tested using several criteria indices such as the Root means standard error (RMSEA), Comparative fit index (CFI), Standard mean square residual (SRMR), Coefficient of Determination (CD), and Tucker-Lewis index (TLI). According to Hair et al. (2014), these fitness indices must meet certain criteria to support the fitness of the model. The results, as shown in Table 4, suggest that all the four measurement models meet the basic criteria (CFI, CD TLI, and GFI > 0.90; SRMR < 0.05; and RMSEA < 0.08), indicating acceptable model fit.

Table 4.

Fit Indices for Measurement Constructs.

Constructs	CFI	TLI	RMSEA	SRMR	CD
Voluntary tax compliance (VTC)	0.997	0.993	0.040	0.010	0.852
Trust in government (TGV)	0.988	0.980	0.000	0.000	0.860
Perceived fairness in tax law (PTF)	0.89	0.990	0.000	0.000	0.871
Tax knowledge (TKN)	0.999	0.998	0.000	0.000	0.753

Source. Authors’ computation using Smart PLS 3.

Result of the Hypotheses Testing

The results of the hypothesis testing, as shown in Table 5, indicate that tax knowledge is a significant predictor of voluntary tax compliance intentions (β = .34, t = 5.12; p < .01). This finding implies that increased knowledge and awareness of the tax system can increase the intentions of SME managers to comply with the tax regulations. It is further observed that trust in the tax system and perceived fairness in the tax laws are also positive and significant predictors of voluntary tax compliance. Thus, hypotheses: H₁, H₂ , and H₃ are duly accepted. This result suggests that if SME owners/managers perceived the existing tax laws as fair, they are likely to willingly pay their taxes. The significant positive relationship between tax trust and voluntary tax compliance also suggests that SME owners will comply with the tax laws willingly if they trust the government and the tax authorities.

Table 5.

Direct Relationships.

Hypothesis	Regression relationship	Coefficient (β)	Stand. error	t-Statistic
H₁	PTF → VTC	.24***	0.056	4.29
H₂	TKN → VTC	.34***	0.066	5.12
H₃	TGV → VTC	.28***	0.065	4.15

p < .10; **p < .05; ***p < .01

The study also sought to examine the extent to which perceived tax fairness mediates the relationship between the independent variables and the dependent variable. This was achieved by decomposing the analysis into total, direct, and indirect as shown in Table 6. From the results, it is observed that the total effect of tax knowledge (TKN) is 0.44, which is statistically significant (p < .01). The direct effect of tax knowledge is 0.34, which is also statistically significant (p < .01). The result further indicates that the indirect effect of tax knowledge that passes through perceived tax fairness is 0.064, which is statistically significant (p < .01). Also, the indirect effect of trust in government (TGV) that passes through perceived tax fairness (PTF) is statistically significant (β = .13, z = 3.44, p < .01). Generally, if the absolute value of the indirect effect is greater than 0.05, the effect may be significant. Thus, from the results obtained, we accept the hypotheses; H₄ , and H₅ and conclude that perceived tax fairness significantly mediates the relationship between tax knowledge and tax compliance intentions on one hand and the relationship between trust in government and voluntary tax compliance on the other. The overall structural model, as depicted in Figure 3, is also significant since the main fitness indices meet recommended thresholds.

Table 6.

Total, Direct, and Indirect Effect.

Hypothesis	Path	Total effect	Direct effect	Indirect effect
H4	TKN → PTF → VTC	0.44*** (6.10)	0.31*** (5.31)	0.064*** (3.12)
H5	TGV → PTF → VTC	3.81*** (6.47)	0.29*** (4.11	0.13*** (3.44)

Note. TKN = tax knowledge; PTF = perceived tax fairness; VTC = voluntary tax compliance.

p < .10; **p < .05; ***p < .01

Figure 3.

Measurement model.

Conclusion and Policy Implications

In developing countries like Ghana, the ability of the government to raise the needed tax revenue is crucial for managing budget deficits and improving the well-being of the citizenry. Unfortunately, non-compliance with tax laws has become a major problem that continues to affect tax mobilization in developed and developing countries alike (Alm et al., 2011). Over the years, the consistent budget deficit suffered by Ghana is partly blamed on the low mobilization of tax revenue. It is estimated that the tax revenue to GDP of the country hovers around 13.4%, which is very low compared to the average tax-to-GDP ratio in Africa (OECD, 2022). With the realization that voluntary tax compliance can reverse this trend and improve the tax mobilization of the country, the current study sought to examine the behavioral factors that influence voluntary tax compliance among SMEs in Ghana, with a specific focus on the oil-rich Western Region.

Using SEM techniques, our study provides interesting insights into voluntary tax compliance in the developing world. First, we observe that trust in government has a significant positive effect on voluntary tax compliance among SMEs in Ghana. This result implies that as the level of trust in government by SME owners increases, it leads to improvement in their tax compliance. Thus, if SME owners/managers perceive that their government can be trusted to use taxes judiciously to better their lives, they are more likely to voluntarily comply with the tax regulations proposed by the government. This observation is consistent with findings from prior studies that have examined the relationship between tax compliance and trust in government. Also, perceived tax fairness was found to be a significant predictor of voluntary tax compliance among SME owners/managers implying that when SME owners/managers perceive the tax system within the country as fair, they will voluntarily comply with its dictates. Generally, this is not too surprising since fairness in the tax system is considered one of the main cardinal points that determine its acceptability and compliance. The significant positive relationship between perceived tax fairness and voluntary tax compliance observed in this study conforms with the findings of existing studies such as Jimenez and Iyer (2016), Geberegbe et al. (2015), and Azmi et al. (2016). The finding underscores the need for tax authorities and governments to design tax policies that are deemed to be generally fair from the perspective of SME owners. It must be stated, however, that whereas it is difficult to design a tax regime that can fully meet the principle of fairness, an effective tax regime that seeks to achieve both vertical and horizontal fairness must be developed.

We further observed that tax knowledge also has a significant influence on both the perceived fairness of the tax system and compliance decisions. Furthermore, the relationship between tax knowledge and voluntary tax compliance on one hand, and trust in government and compliance on the other hand, are significantly mediated by perceived tax fairness. Our results provide an opportunity for policymakers to develop alternative strategies and programs to enhance tax revenue mobilization through voluntary tax compliance. It highlights the importance of perceived tax fairness and trust in government as important determinants of voluntary tax compliance. It, therefore, provides an opportunity for governments and policymakers to develop a tax regime that is perceived to be fair and can be trusted by SME owners/managers, it is thus recommended that government agencies such as the Ghana Enterprise Agency (GEA)and the Ghana Revenue Authority (GRA) intensify tax education activities among SMEs. Such education must focus on enhancing their knowledge and awareness of the existing tax framework. This will go a long way to improve their level of tax compliance.

Our findings provide important evidence that can influence policy decisions of the government not just in Ghana but also governments and policymakers in other African countries. First, tax knowledge promotes acceptance and compliance. Regulators should precede their tax revenue mobilization activities with education and training if they are to succeed. Second, governments must strengthen their institutional frameworks to reduce corruption, misappropriation of public funds, and profligate expenditure by state officials. These will among other things ensure transparency and improved public confidence in the state and consequently facilitate tax revenue mobilization efforts. Civil society organizations can stand on the back of these findings to demand greater accountability from the state and its agencies.

This study is not without some limitations. First and foremost, the study uses a survey design that relies on survey data. This design suffers from the limitations that accompany a typical cross-sectional study. Second, the current study was based on SMEs within the Western Region of Ghana and as a result, caution must be exercised when attempting to generalize the findings to cover other firms. Third, while we acknowledge that tax fairness significantly mediates the relationship between the independent variables and the dependent variable, it must be noted that tax fairness may not be the only mediating variable. Future researchers may include other possible mediators. Finally, there may be explanatory variables that could significantly affect voluntary tax compliance. Also, the impact of demographic factors on voluntary tax compliance was not examined in this study. Whereas studies such as Kogler et al. (2013) have observed that gender is an important predictor of voluntary tax compliance, this study is unable to empirically verify these results. Future studies may consider demographic and other social factors and their influence on voluntary tax compliance. Notwithstanding these limitations, this paper makes a valuable contribution to the tax compliance literature in developing countries by providing important empirical insight into the social and behavioral factors that influence voluntary tax compliance. It also highlights the important role of tax fairness in promoting voluntary tax compliance among SMEs in developing economies.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Joseph Akadeagre Agana

Data Availability Statement

The study made use of data, and can be shared upon request.

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Tax Knowledge,Trust in Government,and Voluntary Tax Compliance: Insights From an Emerging Economy

Abstract

Plain Language Summary

Keywords

Introduction

Literature Review and Hypothesis Formulation

Methodology

Research Design

Data and Variable Measurements

Data Estimation Techniques

Results and Discussions

Demographic Profile of Respondents

Descriptive Statistics and Correlation Results

Factor Analysis, Reliability and Validity Tests

Result of the Hypotheses Testing

Conclusion and Policy Implications

Footnotes

Declaration of Conflicting Interests

Funding

ORCID iD

Data Availability Statement

References