Taxation is a tool used by government to raise revenue. It is also used as an instrument of economic and social policy. This paper adopted Randomized Response Technique to estimate proportions of non-compliance of taxpayers in Akure metropolis as well as analysing socio-demographic variables which may affect those proportions. Survey questionnaires were administered on taxpayers in Akure with a view to collecting data from them. The data collected were analysed using z-test. The findings of this study revealed that among the respondents completing the Randomized Response survey instrument, 47.7% admitted tax evasion by trading goods and not reporting it in tax form, 48.7% admitted evasion by excluding some outside income, 49.8% admitted tax evasion by being paid in cash and not reporting it, 43.7% admitted evasion by hiding investment to avoid payment of tax while 43% admitted evasion by cheating on tax whenever the chances arises respectively

Adeosun, Samuel Odunayo

Adepetun, Akinola Oladiran

English

Malaysian Journal of Applied Sciences (Journal of UniSZA - Universiti Sultan Zainal Abidin)

Malaysian Journal of Applied Sciences 2018, Vol 3(2): 1-7  ©Universiti Sultan Zainal Abidin eISSN 0127-9246 (Online)  1  Malaysian Journal of Applied Sciences       ORIGINAL ARTICLE  A Survey on Tax Evasion using Randomized Response Technique  *Adepetun, A.O. and Adeosun, S. O. Department of Statistics, Federal University of Technology, PMB 704, Akure, Ondo State, Nigeria *Corresponding Author: aoadepetun@futa.edu.ng Received: 05/02/2018, Accepted: 06/12/2018  Abstract Taxation is a tool used by government to raise revenue. It is also used as an instrument of economic and social policy. This paper adopted Randomized Response Technique to estimate proportions of non-compliance of taxpayers in Akure metropolis as well as analysing socio-demographic variables which may affect those proportions. Survey questionnaires were administered on taxpayers in Akure with a view to collecting data from them. The data collected were analysed using z-test. The findings of this study revealed that among the respondents completing the Randomized Response survey instrument, 47.7% admitted tax evasion by trading goods and not reporting it in tax form, 48.7% admitted evasion by excluding some outside income, 49.8% admitted tax evasion by being paid in cash and not reporting it, 43.7% admitted evasion by hiding investment to avoid payment of tax while 43% admitted evasion by cheating on tax whenever the chances arises respectively.   Keywords: Randomized response technique, tax evasion, socio-demographic variables, taxpayers, z-test   Introduction  The randomized response technique was proposed originally by Warner (1965). The innovative approach was designed to protect the privacy of survey respondents when they were asked sensitive questions. In the Warner design, the respondents are given two logically opposite questions and are instructed to answer one or the other depending on the outcome of a randomizing device. For example, suppose the sensitive characteristic is tax evasion. The respondent may be asked to toss a dice, and the outcome determines which question they answer.  Question 1: I have evaded tax.  Question 2: I have never evaded tax.   Malaysian Journal of Applied Sciences 2018, Vol 3(2): 1-7   2  The methods currently used to gather information on the level of tax evasion in Akure metropolis are insufficient. Tax collectors have generally relied upon tax form collected from FIRS (Federal Inland Revenue Services), or direct questioning via interview to derive estimates of tax evasion activity (Kalvass and Geibel, 2006). Unfortunately, each of these methods has been shown to greatly underestimate the actual amount of illegal activity (Buchman and Tracy, 1982; Fox and Tracy, 1986).  A precise definition of taxation by Olatunde (2007) and Ogundele (1999) is that taxation is one of the sources of income for government, such income as used to finance or run public utilities and perform other social responsibilities. According to Mason and Calvin (1978) taxation is the most important source of revenue for modern governments, typically accounting for ninety per cent or more of their income. Soyode and Kojola (2006) define tax evasion as an intentional and conscious practice of not revealing full taxable income. It is a violation of tax laws in which the tax rate due by a taxable person is unpaid after the minimum required period (Abdurafiu et al., 2010). The design originally outlined by Warner (1965) has been extended to incorporate multiple sensitive traits (Horvitz et al., 1967).  A precise definition of taxation by Olatunde (2007) and Ogundele (1999) is that taxation is one of the sources of income for government; such income is used to finance public utilities and perform other social responsibilities. According to Mason and Calvin (1978) taxation is the most important source of revenue for modern governments, typically accounting for ninety per cent or more of their income.  Taxes are classified into direct and indirect. Yunusa (2003) and Aguolu (2004) defined direct taxes as taxes levied on the income of individual, group of individuals, and business firms and are paid directly by the person or persons on which it is legally imposed by the tax authority has been extended to incorporate multiple sensitive traits (Horvitz et al., 1967). In this study, we conducted a survey to investigate the rate at which people keep indulging in tax evasion for their own personal gain.  Methodology  This study involves the administration of survey questionnaires on tax evasion on some respondents in Akure metropolis using randomized response technique for effective data analysis. The survey was composed of three sections: randomized response technique questions about tax evasion; questions related to the respondent’s awareness of regulations and experience in paying tax. Using data from all three sections, an estimate of the proportion of violators were analysed against regulation awareness and demographic questions to clearly distinguish different characteristics of the tax payer surveyed.   Results and Discussion  Three hundred people were approached to participate in this survey. The final responses rate was 93% (279 of 300 approached). Approximately 0.141% of the total taxpayers’ population of 197,320 were surveyed.  The second section of the survey completed by respondents used the randomized response technique to estimate levels of non-compliance with regulations of the Federal Inland Revenue Service. Table below shows the questions that were included in the randomized response technique section. In all of the randomized response questions, the targeted sensitive reply was a response of “yes”.         Malaysian Journal of Applied Sciences 2018, Vol 3(2): 1-7   3  Table 1. Randomized response technique survey questions  RRT 1 Trading or exchanging goods or services with friends or neighbor and not reporting it in your tax form RRT 2 Reporting your main income fully but excluding small outside income. RRT 3 Being paid in cash for a job and then not reporting it in your tax form.   RRT 4 Not reporting some earnings from investment or interest that the government would not be able to find out RRT 5 Cheating on Tax if you have the chance.       Data Analysis  The calculation of the proportion of non-compliance of taxpayers in Akure metropolis was obtained using the estimator   ?̂? =(𝑥𝑛 + 𝑝 − 1)(2𝑝−1)  according to Warner (1965) where ?̂?  is the estimated proportion of ‘yes’ responses; x is the number of   “yes” responses to the sensitive questions; p is the  predetermined probability of answering the sensitive questions; and n  is the total number of valid responses respectively.   Hypotheses Development  Guided by the results of previous studies, we hypothesized the following relationships between the demographic attributes of taxpayers and their propensity to evade tax. H1: Men will display higher proportion of tax evasion than women. H2: The proportion of tax evasion will be higher for married taxpayer than for single taxpayer. H3: Taxpayers with higher level of education will exhibit a higher proportion of evasion than taxpayers with lower level of education. H4: Self-employed taxpayers will exhibit higher proportion of tax evasion than employees.   Statistical Procedures  Z-tests were used in hypotheses testing. All comparisons involving randomized response data used the estimated proportion of evasion and the sampling variance to calculate the z-score, using the estimator    Z =  𝑋1−𝑋2− … −𝑋𝑛(𝑉𝑎𝑟(𝑋1)+ 𝑉𝑎𝑟(𝑋2)+ …+𝑉𝑎𝑟(𝑋𝑛) )12⁄   (1)  where X is the estimated proportion of the respondents admitting tax evasion; Var (X) is the variance of the estimated proportion and α is the level of significance (α = 0.05); Zα = 1.96    Malaysian Journal of Applied Sciences 2018, Vol 3(2): 1-7   4   Table 2. Proportion analysis of Tax Evasion against Gender  Type of Evasion Gender No of “yes” Responses Proportion of Evasion Z score RRT 1 Male 66 45.1%  0.647 Female 67 39.5% RRT 2 Male 70 55%  0.518 Female 66 37.2% RRT 3 Male 63 37.7%  -0.206 Female 76 60.5% RRT 4 Male 57 23%  -0.163 Female 65 34.8% RRT 5 Male 57 23%  -0.131 Female 63 30.2%      Table 3. Proportion analysis of Tax Evasion against Marital Status  Type of Evasion Marital Status No of “yes” Responses Proportion of Evasion Z score RRT 1 Married 68 36.5% -0.468 Single 65 48.7% RRT 2 Married 72 45.5% -0.010 Single 64 46.2% RRT 3 Married 76 54.5% 0.098 Single 63 43.6% RRT 4 Married 70 41% 0.154 Single 52 15.6% RRT 5 Married 74 50% 0.189 Single 46 0.38%    Malaysian Journal of Applied Sciences 2018, Vol 3(2): 1-7   5   Table 4. Proportion analysis of Tax Evasion against Employment  Type of Evasion Employment No of “yes” Responses Proportion of Evasion Z Score RRT 1 Govt./Public organization 35 45.4%  -0.120 Private business 61 44.7% Self Employed 37 35.6%      RRT 2 Govt./Public organization 35 45.4%  -0.242 Private business 56 31.5% Self Employed 45 68.5%      RRT 3 Govt./Public organization 35 45.4% -0.115 Private business 70 68.5% Self Employed 34 23.3%      RRT 4 Govt./Public organization 34 40.7% -0.021 Private business 56 31.5% Self Employed 32 15%      RRT 5 Govt./Public organization 28 13% -0.147 Private business 57 34.1% Self Employed 35 27.4%                Malaysian Journal of Applied Sciences 2018, Vol 3(2): 1-7   6   Table 5. Proportion analysis of Tax Evasion against Education level  Type of Evasion Education Level No of “yes” Responses Proportion of Evasion Z Score RRT 1 Primary 11 42.8% -0.178 Secondary 44 71.4% Tertiary other than university 45 24.8% University 33 36.1% RRT 2 Primary 11 42.8% -0.185 Secondary 39 50% Tertiary other than university 52 46.9% University 34 40.7% RRT 3 Primary 15 100% -0.079 Secondary 41 58.5% Tertiary other than university 50 40.6% University 33 36.1% RRT 4 Primary 7 -15.2% -0.244 Secondary 38 59.3% Tertiary other than university 47 31.1% University 30 22.2% RRT 5 Primary 8 -2.4% -0.179 Secondary 33 24.4% Tertiary other than university 48 34.3% University 31 26.9%   Conclusion  Of the respondents completing the randomized response survey instrument, 47.7% admitted tax evasion by trading goods and not reporting it in tax form and 48.7% admitted evasion by excluding some outside income and 49.8% admitted tax evasion by being paid in cash and not reporting it and 43.7% admitted evasion by hiding investment to avoid payment of tax lastly, 43% admitted evasion by cheating on tax if the chances arises. H1 hypothesizes that men would display a higher proportion of evasion than women. The results in Table 1 indicate that higher proportion of evasion occurred among women than men pointing to a different direction from the hypothesized one.  H2 hypothesizes that the proportion of tax evasion will be higher for married taxpayer than for single taxpayer. The results in Table 2 indicate that higher proportion of tax evasion occurred among married taxpayer than single taxpayer contrary to the hypothesized direction.  H3 tests whether taxpayers with higher level of education exhibit higher proportion of evasion than taxpayers with lower level of education contrary to the hypothesized direction, a negative relationship between education and tax evasion was found. Taxpayers without tertiary education tended to have higher proportions of tax evasion (71.4% for RRT1, Malaysian Journal of Applied Sciences 2018, Vol 3(2): 1-7   7  50% for RRT2, 58.5% for RRT3 and 59.3% for RRT4) than taxpayer with tertiary education (36.1% for RRT1, 46.9% for RRT2, 40.6% for RRT3 and 31.1% for RRT4), but none of the differences are statistically significant, so H3 is rejected. In H4, we hypothesized that self-employed taxpayers would exhibit higher proportion of tax evasion than employees. The results in Table 3 indicate higher proportion of evasion occurred among private organization taxpayers than any other taxpayers pointing to a different direction from the hypothesized one.   References  Abul-Ela, Abdel-Latif, A., Greenberg, B. G. and Horvitz, D. G. (1967): A multiproportion randomized response model. Journal of the American Statistical Association, 62, 990-1008.  Aguolu, O. (2004): Tax policy reform in Nigeria. World institute for developmental Economic research (WIDER) research paper, 2006/03 Finland, UNU_WIDER.   Buchman, T. A. and Tracy, J. A. (1982): Obtaining Responses to Sensitive Questions: Conventional Questionnaire versus Randomized Response Technique. Journal of Accounting Research, 20(1), 263-271.  Fox, J.  A. and Tracy, P.  E. (1986):  Randomized Response: A method for sensitive surveys, 67(1), 116-129.  Kalvass, A. S. and Geibel, I. J. (2006): The unrelated question randomized response model. Proceedings of the Social Statistics Section, 3, 211-220.  Mason, R. and Calvin, L. (1978): A study of admitted income tax evasion. Law and Society Review (Fall), 4, 73-89.  Ogundele,  A. E. (1999): Impact of tax administration on government revenue in a developing economy- A case study of Nigeria. International Journal of Business and Social Science, 3(8), 99-113.  Olatunde, J. O. (2007):  Tax Evasion, Tax Avoidance and Corruption. An Interface with Source of Finance for Development in Nigeria, 2, 114-122.  Soyode, L. and Kajola, S. O. (2006): The Relationship between Culture and Tax Evasion Across Countries: Additional Evidence and Extensions. Journal of International Accounting, Auditing and Taxation, 17, 67– 78.   Temitope, O. F., Olayinka, M. U. and Abdurafiu, O. N. (2010): The Ethics of tax evasion: Perceptual evidence from Nigeria. European Journal of Social Science, 8(3), 360-371.  Warner, S. L. (1965): Randomized response: a survey technique for eliminating evasive answer bias. Journal of the American Statistical Association, 60, 63-69.  Yunusa, A. A. (2003): Improving interview method and questionnaire design. San Francisco: Jossey-Bass Publishers.         How to cite this paper: Adepetun, A.O. & Adeosun, S.O. (2018). A Survey on Tax Evasion using Randomized Response Technique. Malaysian Journal of Applied Sciences, 3(2), 1-7. 

A Survey on Tax Evasion Using Randomized Response Technique

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A Survey on Tax Evasion Using Randomized Response Technique

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