Tax compliance determinants among M40 & T20 income group in east Malaysia with mediating effect of tax morale and trust

Abstract

The study is encouraging because tax compliance is challenging to attain. In 2018, Inland Revenue Board Malaysia (IRBM) highlighted that 2.27 million Malaysians paid tax out of a workforce of 14 million. It is also worth noting that systematic tax compliance study in East Malaysia (Sabah and Sarawak) was undertaken far less often, warranting further examination. This study investigates the association between governance, power of tax authorities, social media, tax knowledge, political affiliation, tax morale and trust in government with tax compliance behaviour. The study introduces tax morale and trust in government as mediators. Contrary to most earlier research investigating trust to tax morale, this study aims to offer new insight in the opposite direction on whether tax morale affects trust in government. The study also examined the new construct of social media in the tax compliance model. Three theories were applied to support the theoretical framework: Institutional Theory, Theory of Planned Behaviour (TPB), and Legitimacy Theory. A quantitative survey of 592 salaried and self-employed taxpayers was conducted. This includes taxpayers in the M40 (Middle 40) and T20 (Top 20) categories. The analysis was performed using IBM SPSS, and the measurement and structural model were assessed using Partial Least Squares Structural Equation Modelling (PLS-SEM) with bootstrapping. This study indicates that over half of the findings are validated by prior research. The outcomes of this study contribute to the theoretical and practical implications in a few ways. Specifically, tax morale and trust in government were evident to play a significant role in the mediation relationship. Interestingly, variances in trust can also be explained by variability in tax morale. Subsequently, the present study provides novel insight to Inland Revenue Board of Malaysia (IRBM) and the government that better tax knowledge, tax morale, and trust in government can improve revenue collection. Nevertheless, the power of tax authorities, governance, and social media are all moderately effective but of less importance in increasing compliance. Finally, political affiliation was not an important indicator of increasing tax morale and compliance. Future studies should anticipate socio-demographic as moderators, replicate the model in different regions, or use a qualitative or mixed-method.