PSYCHOLOGY OF TAX COMPLIANCE AND ITS IMPACT ON TAX REVENUE GENERATION: A THEORETICAL APPROACH

Abstract

In this study, tax compliance psychology is examined from a theoretical perspective and its impact on tax revenue generation. While the traditional economics models of tax compliance focus primarily on deterrence, the probability of audit, the amount of penalty, and the fear of punishment, these factors are just a few of the reasons why taxpayers might not comply with the tax law. But this is not a complete answer as to why, despite limited penalties and low audit rates, many citizens still pay taxes. The study, therefore, draws on the theory of behavioral economics, social psychology and institutional theory. It emphasizes central psychological variables like tax morale, trust in authorities, perceived fairness, social norms and psychological contract of citizens and the state. The study also uses the Slippery Slope Framework that emphasizes the importance of both authority power and public trust in determining enforced and voluntary compliance. Strict enforcement, it is found in the theory, can lead to an increase in tax revenues in the short term but the sustainable tax revenues are more dependent on voluntary compliance which can be obtained through trust, fairness, transparency and positive attitudes of taxpayers. This study ends up establishing that the process of tax revenue generation is not only an economic or legal issue but is a psychological and social process as well. Hence, governments should go beyond the excessive burden on penalties and audits and establish a fair, transparent and trust-based tax regimes, which would invite citizens to pay tax without due compulsion.