Wealthy Tax Non-Filers in a Developing Nation: The Roles of Taxpayer Knowledge, Perceived Corruption and Service Orientation in Pakistan

Abstract

Although tax non-filing and the resulting tax evasion are a challenge to public welfare, particularly in developing countries, scholarly knowledge on taxable citizens who do not register as taxpayers, also known as the ‘ghosts’, is minimal. To expand this knowledge base, this empirical paper compares rich self-employed individuals identified as non-filers with a randomized group of tax filers with similar socio-demographic backgrounds in terms of two bases of perceived tax system legitimacy: knowledge of taxpayers’ rights and perceived corruption in the tax administration. The results indicate not only that that both of these factors are related to tax non-filing but that a perceived service orientation of the tax administration is related to increased tax knowledge and lower perceptions of corruption. These findings imply that services which reduce citizens’ ignorance of their tax rights and reduce doubts about authorities’ correct behaviour might foster perceived legitimacy of the tax system and in turn increase willingness to pay taxes in developing countries.

Keywords: Wealthy tax non-filers, tax morale, tax compliance, tax knowledge, knowledge of rights, corruption, tax evasion, developing countries, Pakistan

JEL Classification: H26, O17, E26, H70, I30