How can value added tax compliance be incentivized? An experimental examination of trust in government and tax compliance costs

Abstract

Purpose This study aims to investigate the relationship between trust in government, value added tax (VAT) compliance costs and VAT compliance in the Jordanian retail industry context. Design/methodology/approach The study makes use of an online questionnaire survey to collect the required data, and the research model is eventually validated based on 189 responses gathered from the retail industry in Jordan. The obtained data was analyzed using partial least squares-structural equation modeling to examine the effects of trust in government and costs of VAT compliance on VAT compliance. Findings The results showed that VAT compliance costs have no significant influence on VAT compliance; while trust in government was found statistically positive significant with VAT compliance. Practical implications This study’s results are expected to have implications for VAT authorities and policymakers in Arab countries, like Jordan in their policies formulation to enhance VAT compliance in retail industry. The study’s findings are alerting the policymakers for the positive noneconomic consequences of VAT compliance. It provides evidence that trust in government can increase VAT compliance. Social implications The results of the research have a plentiful of social implications. Higher VAT compliance will enable higher levels of government spending on a many of social targets such as health, education, welfare programs and infrastructure. Originality/value While the study builds on recent research examining how to incentivize VAT compliance, it simultaneously seeks to make three contributions. First, the study design aims to apply recent advances in behavioral sciences (impact of trust in government and VAT compliance costs) in a policy area that has not seen much use of such interventions in the Jordanian context (i.e. VAT compliance). Second, the study is government procedures pertinent in the sense that it aims to increase the effectiveness of existing government policies by complementing them with behavioral primes. Third, there is nearly no literature found applying this topic in a developing country such as Jordan. To the best of the author’s knowledge, this is the first study that examines the trust in government and VAT compliance costs on VAT compliance among Jordanian retail industry. Thus, this paper contributes to mitigating the literature gap by providing empirical evidence concerning the influence of trust in government and VAT compliance costs on the retail industry VAT compliance in the Jordanian context.