The impact of changes in audits and penalties on tax compliance behaviour: evidence from South Africa

Abstract

Tax revenue is a major source of public revenue in South Africa, and it plays an integral role in creating the fiscal space to provide public services and infrastructural development. Tax collection is, however, impeded by evasion. To enhance compliance, the government has made several changes to existing tax penalty structures, and introduced new ones as well. The question arises whether these deterrence measures effectively reduce evasion. International empirical evidence on the efficacy of such policies is mixed, and mainly drawn from developed country applications. Hence, evidence from developing countries is limited. This study employed a laboratory experiment to examine taxpayers’ behavioural responses to changes in audit and penalty rates in South Africa. Results showed that both audits and penalties influenced salaried and non-salaried income taxpayers to increase their compliance levels. However, the effect was higher on non-salaried taxpayers. The study also established that audit and penalty rates had a negative joint effect on both salaried and nonsalaried compliance rates. The impact was larger on salaried taxpayers. These findings suggest that, although audits and penalties are effective enforcement measures, the manner in which they are applied must be given careful consideration, as excessive enforcement reduces taxpayers’ intrinsic motivation to comply, hence reducing voluntary compliance. The study used a novel experimental setting, whereby compliance was disaggregated into salaried and non-salaried, which gave a clearer effect of deterrence measures on compliance.