FACTORS AFFECTING FAIRNESS OF TAXATION TO CATEGORY

“B” TAXPAYERS: THE CASE OF DIRE DAWA ADMINISTRATION

MBA Thesis

Alem Kebede Tekle

MARCH, 2018

Haramaya University, Haramaya

Factors Affecting Fairness of Taxation to Category “B” Taxpayers in Dire
Dawa Administration

A Thesis submitted to the department of Management, School of Graduate

studies

HARAMAYA UNIVERSITY

In Partial Fulfillment of the Requirements for the Degree of

MASTER OF BUSINESS ADMINISTRATION

BY

Alem Kebede

March, 2018

Haramaya University, Haramaya

ii
 HARAMAYA UNIVERSITY
SCHOOL OF GRADUATE STUDIES

I hereby certify that I have read and evaluated this Thesis entitled “Factors affecting fairness

of taxation to category “B” taxpayers” prepared under May guidance by Alem Kebede Tekle.

I recommend that it be submitted as fulfilling the thesis requirement.

________________ _______________ _________________

Major Advisor Signature Date

As a member of the Board of Examiners of the MBA. Thesis Open Defense Examination, I
certify that I have read and evaluated the Thesis prepared by Alem Kebede and examined the
candidate. I recommend that the thesis be accepted as fulfilling the Thesis requirements for the
degree of Master of Science in Business Administration.

________________ _______________ ___________________

Chairperson Signature Date

_________________ _______________ ____________________

Internal Examiner Signature Date

________________ ________________ __________________

External Examiner Signature Date

Final approval and acceptance of the Thesis is contingent upon the submission of its final copy
to the council of Graduate Studies (CGS) through the candidate’s department or school
graduate committee (DGC or SGC).

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 STATEMENT OF THE AUTHOR

By my signature below, I declare and affirm that this Thesis/Dissertation and compilation of
this Thesis/Dissertation is my own work. I have followed all ethical principles of scholarship
in the preparation, data collection, data analysis and compilation of this Thesis/Dissertation.
Any scholarly matter that is included in the thesis /Dissertation has been given recognition
through citation.

This Thesis/Dissertation is submitted in partial fulfillment of the requirements for a master of

business administration degree at Haramaya University. The Thesis/Dissertation is deposited
in the Haramaya University library and is made available to borrow under the rule of the
library. I solemnly declare that this Thesis/Dissertation has not been submitted to any other
institution anywhere for the award of any academic second degree.

Brief quotation from this Thesis/Dissertation may be made without special permission
provided that accurate and complete acknowledgement of the source is made. Requests for
permission for extended quotations from or reproduction of this Thesis/Dissertation in his or
her judgment the proposed use of the material must be obtained from the author of the
Thesis/Dissertation.

Name----------------------------------------- Signature---------------------------

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 ACKNOWLEDGMENT

First and for most, I would like to praise almighty God for his forgiveness, charity and
strength has given to me.

Secondly, I would be very happy to express my heartfelt deepest gratefulness to my advisor

Dr. Workneh Kassa for his priceless and unreserved support through his continuous advice.

I am also greatly indebted to those, who are employees of Dire Dawa Administration Tax
Authority and Category “B” taxpayers found in Dire Dawa Administration for their invaluable
cooperation.

My deepest thanks go to my adored father, Ato Kebede Tekle; my mother, W/ro Yewalashet
Degfu and my beloved wife, Misrak Hailu for their beyond price advise and encouragement
that gave me strength.

Finally, I would like to thank all my classmates for their support during my stay at the
university.

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 ACRONYMS AND ABBREVIATIONS

AICPA American institution of certified public accountant

ERCA Ethiopian Revenue and Custom Authority

FDRE Federal Democratic Republic of Ethiopia

GDP Gross Domestic Product

GTP Growth and Transformation Plan

MOFED Ministry of Finance and Economic Development

OECD Organization for Economic Cooperation and Development

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 ABSTRACT

Currently Ethiopia is in an era of renaissance and struggling to overcome poverty. For

Ethiopia taxation is a weapon that supports this struggle and for this to happen a fair tax

system is needed. This study was conducted to identify factor affecting fairness of taxation to

category “B” taxpayers in Dire Dawa Administration. The study used a cross-sectional survey

design. It used both primary and secondary data and adopted mixed research approach. To

get the primary data self-administered questionnaire and in-depth-interview were used. To

conduct the survey, from four urban kebeles 200 respondents of Category “B” taxpayers’

were selected by applying systematic random sampling technique. Descriptive statistical tools,

reliability test, multicollinearity test, correlation, multiple regression and statistical

package(SPSS) software, were used to analyze the survey data and thematic analysis were

applied to interpret in-depth interviews. The findings show that fairness of taxation system

directly related with attitude of taxpayers, beliefs of taxpayers, educational level of tax payers,

age of taxpayers and gender of taxpayers significantly affect fairness of taxation system.

Finally, based on the findings possible recommendations were given. These include, treating

taxpayers without any discrimination, bringing non taxpayers to tax system, conducting

extensive awareness creation programs and consultation sessions, creating persuasive

communication with the taxpayers and providing all necessary social services to the general

public, as well as maintaining the tax system fair and equitable. . Thereby, enhancing fair tax

collection and providing basis for further research in a broader scope.

Keywords: Tax, Fairness, Taxpayers, Attitude, Beliefs, Educational level

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 Table of Contents

STATEMENT OF THE AUTHOR iv

ACKNOWLEDGMENT v
ACRONYMS AND ABBREVIATIONS vi
ABSTRACT vii
LIST OF TABLES xi
LIST OF FIGURES xii
1 INTRODUCTION 1
1.1 Background 1
1.2 Statement of the Problem 4
1.3. Objectives of the study 5
1.3.1. General objective 5
1.3.2 Specific Objectives 6
1.4. Significance of the Study 6
1.5. Scope of the Study 6
1.6. Limitations of the Study 7
2. REVIEW OF RELATED LITRATURE 8
2.1. Theoretical Review of Tax Fairness 9
2.3 Characteristics of good tax system 13
2.4. Factors Affecting Fairness of Tax System 14
2.4.1 Attitudes of taxpayers toward Taxation 14
2.4.2. Believe of taxpayers toward meeting their tax obligation 17
2.4.3. Educational Level of Tax payers 18
2.5. Taxation in Ethiopia 21
2.6 The Ethiopian Tax Reform of 2002 and 2008 23
2.6.1 Record Keeping 25
2.6.2 Declaration of Tax 26
2.6.3 Payment of Tax 26
2.7. Taxpayers Obligations 26
2.8. Dimension of Tax Fairness 27
Continue……

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3 RESEARCH METHODOLOGY 30
3.1. Description of the Study Area 30
3.2. Data Sources 30
3.3. Sampling Techniques 31
3.3.1. Sample Size 31
3.4. Method of Data Collection 32
3.5. Methods of Data Analysis 33
3.5.1. Correlation 34
3.5.2. Multiple Regressions 34
3.5.2.1 Model 35
3.6. Reliability Test 36
3.7. Ethical Considerations 36
4. RESULTS AND DISCUSSIONS 37
4.1 Research Results 37
4.1.1 Survey results 38
4.1.1.1. Response rate 38
4.1.1.2. Respondents’ profile 39
4.1.1.3 Attitude of taxpayers toward the fairness of taxation 42
4.1.1.4 Beliefs of taxpayers toward meeting their tax obligations 45
4.1.1.6 Educational Level of Taxpayers 48
4.2 In-depth interview and Content Analysis of Open-ended Questions results 52
4.2.1 In-depth interview results 52
4.2.2 Content Analysis of Open-ended Questions 54
4.3. Analysis of Measures 56
4.3.1. Reliability Test 56
4.3.2 Correlation Analysis 56
4.3.2.1 Pearson correlation coefficient 56
4.3.3 Multicollinearity Test 57
4.3.4. Multiple Regressions Analysis 58
4.3.4.1 Results of multiple regression analysis 58
5. CONCLUSION AND RECOMMENDATION 61
5.1. Conclusions 61
5.2 Recommendations 64
Continue……

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REFERENCE 66
Appendix 1 Fairness of Taxpayers Survey Instrument (English Version) 70
Appendix 2: In-Depth Interviews 77
Appendix 3: Organizational Structure of Tax Authority 78
Appendix 4: Results of Descriptive Statistics 79
Appendix 5 Results of correlation matrix 86
Appendix 6(a) Results of Reliability Test 87
Appendix 6(b) Multicollinearity test for explanatory variables included in
the multiple regression models 87

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 LIST OF TABLES

Table Page
1. Distribution of category “B” taxpayers in sample Kebeles 32
2. Response rate 38
3. Sectors distribution of response 39
4. Respondent position 39
5. Gender of respondents 40
6. Age of respondents 40
7. Respondent Educational background 41
8. Year of Business existences 41
9. Tax Fairness and Ability- to –pay 42
10. Reasons for taxpayers why they paying taxes 42
11. Reason for every equal status pays equal amount taxes 42
12. Descriptive statistic result on attitude of taxpayers 44
13. Reasons for taxpayers beliefs towards fair taxation 45
14. Paying tax and getting social services 46
15. Ability to pay and tax liability 46
16. Descriptive statistics on the beliefs of taxpayers 47
17. Reasons for paying taxes 49
18. Programs of education/ training sessions delivered in a year 49
19. At least average level of tax knowledge 49
20. Belief of taxpayer and tax evasion of high-income earners 50
21. Descriptive statistics of educational level of taxpayers 51
22. Summary of responses on in-depth interview 52
23. Cronbach’s Alpha for Determinant Factors and Tax fairness 56
24. The relationship between independent variables and tax fairness 57
25. Results of multiple regression analysis 59
26. Results of Cronbach’s Alpha 87
27. Results of Variance Inflation Factor 87
 LIST OF FIGURES

Figure Page

1. Conceptual frame work 29

2. Chart of organizational structure 78
 1 INTRODUCTION

1.1 Background

A tax is defined as a "a compulsory contribution payable by an economic unit to a government

without expectation of direct and equivalent return from the government for the contribution
made ” (Bhatia, 2003). Taxes are important sources of public revenue. Public goods such as
roads, power, municipal services, and other public infrastructures are normally supplied by
public agencies due to their natures of non-rivalry and non-excludability. Government
intervention in the supply of public goods is therefore inevitable and can only be done if the
public pays taxes for the production and supply of such goods. Currently, Ethiopia is in an era
of renaissance and struggling to overcome poverty. For Ethiopia, taxation is a weapon that
supports this struggle and for this to take place a fair tax system is needed. In Ethiopia, tax is
administered at federal or central and regional levels. The Constitution of Federal Democratic
Republic of Ethiopia (FDRE) has separated the tax revenue to be collected by federal
government, state or regional government and jointly by the federal and state government. The
regional governments of Ethiopia collect taxes and revenue by bureaus of Regional Inland
Revenue from privately owned enterprises and organs of regional governments. The central
government revenue collection organs are responsible to collect revenues of federal and joint
revenues owned by both the central government and regional governments from different
organizations including those owned by the federal government (Council of Ministers, 2002)

The Ethiopian Revenue and Custom Authority (ERCA) is responsible for the enforcement of
the tax laws relating to income tax particularly business profit taxes, and other types of taxes.
In addition to this, the ERCA is also responsible for collecting withholding tax on payments
made to non-residents relating to interest, royalties, contract payments, special classes income
(such as fees for technical advice) and income in respect of services performed by a public
entertainer. The previous federal income tax proclamation no.286/2002 taxpayers are
categorized into three categories, namely category “A”, “B”, and “C” based on their volume of
sales and form of business. Category “A” includes any company incorporated under the tax
law of Ethiopia or in or a foreign country and other entities having annual turnover of Birr

1
500,000 and more. Category ‘B’ includes those enterprises having annual turnover of more
than Birr 100,000 and less than Birr 500,000. These categories of taxpayers must submit profit
and loss statement at the end of the year. The law requires all entries in the records and
accounts to be supported by appropriate vouchers (Council of Ministers Regulation no.
78/2002: Article 18, Sub Article 2).

According to the current new tax proclamation 979/2016, tax laws contain provisions, which
are expected to reduce the compliance cost burden of category “B” taxpayers (in the new
income tax proclamation, category B taxpayers are unincorporated taxpayers who have annual
gross income from birr 500,000 to one million). For this category of taxpayers, the compliance
requirement has been made less than that of larger taxpayers. Large taxpayers in this case are
those in category “A” (all incorporated taxpayers and others with annual gross income of over
a million birr). Hence, in the new income tax proclamation, category B taxpayers are allowed
to use cash basis of accounting. In addition, category B taxpayers are required to maintain
books and documents only for three years as opposed to the five years period in the existing
law.

Studies have shown that the business profit tax system must be fair; to promote the objective
of an equitable distribution of income. This is documented in the works of, for instance,
Gerbing (1988), Hite and Roberts (1992), Roberts (1994), Christensen and Weihrich (1996),
Richardson (2005), Coetzee, and Oberholzer (2009). So tax fairness is affected by many
factors such as attitudes of tax payers, believes of taxpayers to meet their tax obligation and
awareness of tax payers. Brooks (2001) states that fairness has always been widely regarded as
the most important criterion in judging the tax systems.

The currently prevailing condition of taxation, in Dire Dawa administration, has been causing
wide spread complaints over the unfairness and overstatement of tax by the majority of traders
especially by the taxpayers of category “B”. Taxpayers’ perceptions on the tax system are
important because fairness of the tax system will instill compliance among taxpayers. The
OECD (2010) has discussed three types of fairness in taxation: distributive fairness (the
perception that the government acts as a wise spender of tax revenues); procedural fairness

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(the perception that the tax administration adheres to procedures that are fair in dealing with
taxpayers); and retributive fairness (the perception that the tax administration is fair in
applying punishments when the rules are broken). The latter two are more relevant to tax
administrations (Walsh, 2012). Attitudes about the tax system and perceptions of fairness are
naturally influenced by what the public actually know about it. The tax system must be fair,
both to promote the objective of an equitable distribution of income and to assure continued
voluntary compliance by the taxpayer (Eckstein, 1979). A tax system that is complex, that is
poorly understood by both tax administrators and taxpayers, that creates numerous
opportunities for corrupt behavior, and that involves coercion in the collection of taxes from
reluctant citizens provides a poor basis upon which to build trust between citizens and the
government. If taxpayers do not trust the tax administration to collect taxes fairly and to spend
tax revenues wisely, these will increase non-compliance (Murphy, 2004a).

This study, intends to investigate the factors affecting fairness of taxation in Dire Dawa
Administration. The finding of the research will help the Dire Dawa Administration Inland
Revenue Authority to revise its working system and promote transparency, so that fairness of
the tax system will gradually develop.

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 1.2 Statement of the Problem

As stated by Scholz (1998; 137) in Fjeldstad (2004), without trust there is little basis for social
co-operation and voluntary compliance with laws and regulations that could potentially benefit
everyone. The temptation is not to comply even if others do comply defines the free riding
problem that is endemic in collective action situations in private as well as public institutions.
Tax fairness is essential because tax systems have been perceived as fair in order to obtain a
high degree of voluntary tax compliance. No tax system can function effectively without the
co-operation of the great majority of taxpayers, so the factors which affect fairness are
important.

Governments require large resources today than ever in order to meet the escalating needs of
the people, while balancing income and expenditure through collecting fair tax. As tax is
major source of income to the governments operation, the government of Ethiopia is working
to promote fairness of the tax system among the taxpayers, so as to maintain equality between
the collection plan and capacity of revenue generating within the country. With the same
mission regional governments are also doing to balance their income and expenditure through
collecting fair tax. According to the information obtained from Dire Dawa Administration
Revenues Authority, only about 60% of the business communities which are subjected to tax
are paying their tax obligation regardless of the existing powerful tax proclamation (Lemmesa,
2005). The 2008 E.C annual report of Dire Dawa Administration Revenues Authority shows
that from the total planed level of revenue from direct and municipality the administration
managed to collect on average only about 68% stating lack of fairness on taxation as a cause
for the divergence of collection and generating capacity of tax in the Administration.
.
Amin and John (2008) further revealed that the impact of over-taxation of big and visible
businesses is excessively lowering legally earned as it creates a loophole whereby those small
businesses, including the large informal sectors are taxed either to a much lesser extent or not
at all. Under-capacity of collection of revenue is lack of fairness of taxation due to above
factors that affect fairness of taxation. Poor or weak administration systems affect fairness of
taxation. For instance, tax officers delay to register tax payers’ on time, and delay to give order

4
to use cash register machine on the other hand they give service to those tax payers who are
willing through corruption practices which affects fairness of taxation due to noncompliance
to tax law. Once this attitude prevailed in the public it is difficult to rectify it and costs the
authorities a huge compliance and collection costs, which affects the fairness of taxation due
to noncompliance to tax law. Arum (2012) clarifies the theory of planned behavior and its
applicability to the drive of his research to explain the behavior of taxpayers‟ to meet their tax
obligations. Taxpayers who adopt a game-playing posture enjoy the game of finding the grey
areas of tax law and the challenge of minimizing tax, which affects fairness of taxation. It is
believed that well educated tax payers use their knowledge to overstate their expenses by
increasing the amount stated on no invoice payments. This leads to affect fairness of taxation
because of increasing unnecessary expenses to reduce the income tax; they pay unfair tax
compared with other tax payers. Despite, a lot of efforts have been made to ensure the fairness
of taxation and to reduce tax evasion in the past several years; lack of fairness is still the major
challenge. Therefore, this study tries to investigate those factors that affect fairness of taxation
in Ethiopia, specifically with respect to category “B” taxpayers in Dire Dawa Administration.

In line with that this study attempted to answer the following research questions.

1. How does taxpayers’ attitude affect the fairness of taxation system in Dire Dawa
Administration?

2. How does a taxpayer belief towards payment of tax influence the fairness of taxation in Dire
Dawa Administration?

3. To what extent does the level of education of tax payer influence the fairness of taxation in
Dire Dawa Administration?

1.3. Objectives of the study

1.3.1. General objective

The general purpose of the study is to investigate, the factors that affect the fairness of taxation
system to categories “B” taxpayers and causes of unfair taxation present at Dire Dawa
Administration.

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 1.3.2 Specific Objectives

The specific objectives of the study are:

1. It investigates effect of taxpayer’s attitudes on the fairness of tax in Dire Dawa

Administration.

2. It investigates the influence of taxpayer’s beliefs toward meeting their tax obligation on the
fairness of tax in Dire Dawa Administration.

3. It assesses the impacts of education level of taxpayers on the fairness of tax in Dire Dawa
Administration.

1.4. Significance of the Study

The significance of this study is that, Enhancing, the administration to collect planned amount
of revenue due to compliances of tax payers to tax law and contributing to solve the problem
of unfair taxation and also the result can be used by policy makers in order to make a sound
policy in relation to providing tax fairness as means of reducing tax unfair attitude of tax
payers. The study may serve as a future reference for researchers who need to further
investigate in this area. The study may also contribute to the sum total of the body of
knowledge.

1.5. Scope of the Study

As the main objective of this study is to evaluate factors that affect the fairness of taxation to
category “B” taxpayers, so, other categories of taxpayers were not included in this study. The
study also is limited to investigate the relationship between attitudes of the taxpayers and tax
fairness, beliefs of taxpayer toward meeting their tax obligation on tax fairness and
educational level of taxpayers’ impacts on tax fairness of category “B’’ income taxpayers.
This study covers the area of four urban Kabeles in Dire Dawa Administration selected based
on their respective business sector and density.

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 1.6. Limitations of the Study

The investigation of factors affect the fairness of taxation on category “B” taxpayers of Dire
Dawa Administration requires more time and extreme openness from the respondents. The
quality of the output of this study is contingent on the genuine responses from the respondents.
Hence, the bottlenecks of the study were: lack of openness of the respondent in reacting
questions forwarded to them, lack of sufficient knowledge, and, unwillingness to complete the
questionnaire and/ or giving inadequate attention for filling all the question has also is a major
challenge.

Even though, the concern of the study is taxation as source of governments revenue, this study
is only limited to assessing the fairness of the taxation system for category “B” taxpayers in
four selected urban kebeles of Dire Dawa Administration. Despite such limited scope, results
of the study provide insight into how the fairness of taxation system contributes to the
identification of problems of tax collection.

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 2. REVIEW OF RELATED LITRATURE

In this literature review basic concepts about definition of tax fairness, characteristics of good
tax system, factors determining tax fairness such as attitude of taxpayer, beliefs of taxpayer
and education issues were touched. The empirical work of various researchers and other
reference of the materials were scanned to have basic conceptual framework of the subject
matter.

Conceptual and operational definition:

Fairness of taxation: Tax fairness considered as the practices place an undue tax burden on
certain segments of the tax-paying population, while making it easy for other segments that
significantly lower their tax burdens. Fairness issues relate with justice; it means that what is
right and being equal in opportunity and provision (Richardson, 2005). A fair tax system asks
citizens to contribute to the cost of government services based on their ability to pay. Tax
fairness is the concept of having an equitable tax system.

Attitude of taxpayers: Attitudes represent the positive and negative evaluations that an
individual holds of objects. It is assumed that attitudes encourage individuals to act according
to them. Thus, a taxpayer with positive attitudes toward tax evasion is expected to be less
compliant than a taxpayer with negative attitudes. Attitudes towards tax evasion are often
found to be quite positive (Kirchler & Hoelzl, 2008).

Beliefs of taxpayers: Mustikasari, (2007) defines believes as behavioral beliefs, normative

beliefs, and control beliefs as the three factors that determine a person's behavior. By these
three factors, then individuals will reach the stage of intention, then the last stage is the
behavior. Intention level is the level where a person has the intention to behave, but the
behavior is the one behaving. Finally when the taxpayer has had to pay taxes awareness,
driven by the authority’s services reasonable, as well as the tax penalties then the taxpayer will
have the intention to pay the taxes and then realize that intention.

8
Educational level: Educated taxpayers are more likely to know more about tax law and
regulations of taxation than uneducated taxpayers, and as a result are better aware of the
benefits and services the state provides for citizens. On the other hand, educated taxpayers
may be less compliant because they better understand opportunities for evasion and avoidance
and might be more critical about and better aware of how the state uses tax revenue
(Richardson, 2008).

2.1. Theoretical Review of Tax Fairness

According to Bhatia (1976), a good tax system, in order to achieve various objectives, chooses
and adheres to certain principles which become its characteristics. A good tax system,
therefore, is one which is designed on the basis of an appropriate set of principles, such as
equality or fairness and certainty. Since fairness of a tax system is its corner stone. According
to James (2003), the most obvious requirement of equity or fairness is to treat equal people in
equal circumstances in an equal way. To put it differently, it is essential that a good tax system
should appear equitable to the taxpayers. According to Gravelle (2006), the most obvious
requirement of horizontal fairness (equity) is to treat individual in similar economic positions
taxed at similar rates regardless of their welfare. To put it differently, it is essential that a good
tax system should appear equitable to the taxpayers. The problem here is in deciding who is
equal to whom. Due and Friedlaender (1981), also argue that what is fair or equitable in
taxation is inevitably a value judgment; no scientific specification of an equitable distribution
pattern is possible, or people may be equal income wise while they may be unequal regarding
their expenditure, wealth, total utility and so on. Such a pattern can be specified only on the
basis of a consensus of attitudes of persons in the contemporary society. Lemessa (2005) also
adds that a major responsibility is to ensure that all taxpayers dealt with by a given official are
accorded similar treatment and that all officials dealing with a given taxpayer would accord
the same treatment.

Similarly, Brooks (2001) states that fairness has always been widely regarded as the most
important criteria in judging a tax system. The problem of unfairness is that a tax system

9
allows taxes to be shifted from dishonest to honest taxpayers. The fairness of a tax system may
also be perceived in different ways by the taxpayers and tax authorities. What is fair in the eye
of the tax authorities may not have the same image in the mind of the taxpayers.

The principle of equity asserts that taxpayers of the same levels should be taxed similarly that
is to say tax payers with equal abilities should pay the same amount of tax. Citizens with great
ability should pay more. The principle of equity is also viewed as fairness by most scholars
because it stipulates that those with greatest ability to pay should have the highest tax burden
(AICPA, 1992). The importance of a sound legal structure for effective tax administration and
the importance of incorporating principles that will further tax compliance in the design of that
legal structure. Since each stage of the administrative process is dependent upon the other, to
achieve a significant improvement in the overall effectiveness of the tax administration each
element of the legal structure needs to be designed for maximum effectiveness (Asian
Development Bank, 2001).

According to Kirchler et al. (2006), a tax system defined as being fair when taxpayers are
taxed based on their ability to pay (or vertical fairness), i.e., vertical fairness asserts that
taxpayers with different economic situations should be taxed at different rates. This would
result in higher income earners paying tax at higher rates than the low-income earners.

Equity and exchange based theories view individuals as rational, self-interested and goal
oriented actors who evaluate justice in terms of proportionality of output to inputs among the
participants to an exchange. Due and Friedlander (1981), argue that persons will oppose taxes
that they feel strike them “unfairly” and allow others to escape a “reasonable” burden, and
they will favor taxes they accept to concentrate on others, especially when “others” are non-
humans such as corporations. In this perspective, a fair distribution is one that rewards people
according to their contributions towards providing outcomes (Kinsey, Grasmick, and Smith
1991). As stated by Torgler (2001), an increase in deterrence on honest taxpayers will disrupt
a balance. Taxpayers’ who paid fair dues but gets audited and later fined, and even more
disturbed when others who violated the law not punished. Therefore, taxpayers’ cannot treat
harshly, because according to Murphy (2005) it is not to punish but to repair the harm done
and future compliance. Porcano and Price (1992) suggest that traditionally equity theory

10
indicates two types of equity within a tax system: (1) horizontal equity and (2) vertical equity.
Horizontal equity refers to providing equal treatment to all in the same group whereas vertical
equity refers to giving a suitable differentiation among unequal persons in that group. That
means those who are rich should treat as able to pay higher than lower groups of income
earners. In addition, the implementation of the tax systems based on either progressive tax
structure or flat tax rate structure however, most of the individual taxes are progressive tax
structures. i.e., that is vertical in terms of providing equity does not meet. Therefore, saw, K,
and Sawyer, A. (2010) found that taxpayers adjust their perceived inequalities through tax
evasion. Therefore for reaching in to judgment of tax fairness issue looking the attitudes of
taxpayers‟ is quite important.

The literature on tax compliance has suggested that equity theory, distributive justice and
procedural justice can give insights to examine tax fairness. Torgler (2001) mentioned that tax
fairness is a very important factor influencing taxpayers’ compliance behavior because it is
related to tax burdens. In fact, Smith (1796) argued for any ‘good’ tax system tax fairness is
crucial. McGowan (2000) stated that policy makers in the US believe that public perceptions
can directly affect tax compliance behavior. According to Schisler (1995), equity or fairness is
positively related in some way to tax compliance. Jackson & Milliron (1986) concluded tax
fairness refers to two important dimensions; equity of trade and equity of taxpayers’ burden.
Equity of trade refers to what is received in exchange for the dollars paid towards one’s tax
liability and equity of taxpayers’ burden refers to the equity of distribution of the tax burden
whether is it distributed fairly and evenly with the taxpayers within the same group or is it
between groups.

According to Wenzel (2002), various researchers have stressed the role of perceptions of
justice and fairness, finding that taxpayers are less likely to be compliant with a tax system
they consider unjust, unfair, and thus illegitimate (e.g, Alm, Jackson, & Mckee, 1993; Cowell,
1992; Falkinger, 1995; Roberts & Hite, 1994). There is a growing consensus in the tax
compliance literature that the fairness of an economic system plays an important role in tax
reporting behavior (Chung 2002).

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What constitutes a “fair tax” has been the subject of debate since Adam Smith proposed his
four cannons of taxation in The Wealth of Nations first published in 1776:
a) Cannon of Equity: a tax should be seen to be fair in its impact on all individuals.
b) Cannon of Certainty: taxes should not be arbitrary; the taxpayer should know his or her
liability and when and where to pay it.
c) Cannon of Convenience: the method and timing of tax payment should be convenient
for the taxpayer.
d) Cannon of Efficiency: the tax system should not have an impact on the allocation of
resources and it should be cheap to administer the expected equity.

To sum, regardless of this inherent problem ensuring the fairness or equity of a tax system is
second to nothing. To put it differently, it is essential that a good tax system should appear
equitable to the tax payers.

2.2 Principles of Fairness and Justice

It may be said that governments vary the tax rates to distribute the tax burden between
individuals or classes of the population involved in taxable activities, such as redistribute
resources between individuals or classes in the population. Today’s economists have rather
different theories of what constitutes taxation. Most believe that a tax system should follow the
idea of fairness. British economist Adam Smith laid out this idea in his landmark treatise The
Wealth of Nations (1776). However, the chief justification of taxation rests on the principle of
justice, particularly distributive justice. According to this principle, there should be a fair
distribution of society’s benefits and burdens. The distribution of burdens in taxation requires
proportionate equality, and proportionate equality is not necessarily an equal share but a fair
share of carrying the burden of taxes. Established on the principle of ability to pay, a fair share
means those earners of the lower-income bracket should not be taxed as much as those of the
high-income bracket. A combination of fairness and justice theory is the ability-to-pay
principle, which determines whether the burden of a tax is distributed fairly. The ability-to-pay
principle holds that people’s taxes should be based upon their ability to pay, usually as
measured by income or wealth. One implication of this principle is horizontal equity, which,
among others, states that people in equal positions should pay the same amount of tax. A

12
second requirement of the ability-to-pay principle is vertical equity, the idea that a tax system
should distribute the burden fairly across people with different abilities to pay. This idea
implies that a person with higher income should pay more in taxes than one with less income.

2.3 Characteristics of good tax system

According to Adam smith (Wealth of Nations 1776), a good tax system is designed on the
basis of an appropriate set of rules and also the system should strike a balance between the
interests of the tax payer and the tax authorities. A fair tax system uses a balance of tax
sources related to different concepts of ability to pay: current income basis for an income tax,
wealth basis for property taxes and estate/gift taxes and consumption basis for sales and value
added taxes.

An efficient taxation system has nine attributes with one over-riding characteristic to which
they all contribute. An efficient tax system is:
1. Comprehensive – in other words, it is broad based;
2. Complete – with as few loopholes as possible;
3. Comprehensible – it is as certain as is reasonably possible;
4. Compassionate – it takes in to account the capacity to pay;
5. Compact – it is written as straightforwardly as possible;
6. Compliant with human rights;
7. Compensatory – it is perceived as fair and redistributes income and wealth as necessary
to achieve this aim;
8. Complementary to social objectives;
9. Computable – the liability can be calculated with reasonable accuracy;
All of which facilitate the chance that it will be:
10. Competently managed.
In combination these are key attributes of a good tax system.

According to Bhatia (1976), the attitude of taxpayers is an important variable determining the
contents of a good tax system. It may be assumed that each taxpayer would like to be
exempted from taxpaying, while he would not mind if others bear that burden. In any case, he
13
would want his share to be within the general level of tax burden being borne by others. If this
is not so, he will feel exploited.

2.4. Factors Affecting Fairness of Tax System

2.4.1 Attitudes of taxpayers toward Taxation

Attitudes represent the positive and negative evaluations that an individual holds of objects. It
is assumed that attitudes encourage individuals to act according to them. Thus, a taxpayer with
positive attitudes toward tax evasion is expected to be less compliant than a taxpayer with
negative attitudes. Attitudes towards tax evasion are often found to be quite positive (Kirchler
et al., 2008). Many studies on tax evasion found significant, but weak relationships between
attitudes and self-reported tax evasion (Trivedi,Shehata, and Mestelman, 2004).

The Fischer model suggests two major considerations for altering taxpayers‟ attitudes and
perceptions to tax compliance are the fairness of the tax system and peer influence. Richardson
(2006) it is widely believed by tax administrators and the taxpayers that growing
dissatisfaction with the fairness of tax system is the major causes for increasing tax
noncompliance. Taxpayers may not agree with the government’s spending policies, or if they
perceive that they are not obtaining a fair exchange from the government for their tax
payments, then they are distressed, and report less income than taxpayers who perceive equity
in their exchange with the government (Chung, 2002).

Although the relationships between fairness perceptions and tax behavior are highly complex,
it’s generally assumed that perceptions of fairness are positively related to tax compliance
(Erich, Apolonia, & Alexander, 2006). The common beliefs by tax administrators and the
general public are that dissatisfaction with the tax system is responsible for increased tax
evasion. However, Mason & Calvin (1984) also revealed that high taxes are actually the cause
for tax evasion. The tax payers’ tax morale, and whether the taxpayer sees tax evasion as
ethical or not differs from person to person and therefore is driven by the taxpayer’s
perception on whether or not he or she is fairly taxed. With this in mind, the feeling a taxpayer
has towards the government goes hand in hand with tax morale. Alm and Torgler (2006).

14
At the group level, the taxpayers are interested on the fairness of treating their groups compare
to other groups, when a group perceived that it is not fairly treated in respect to tax burden in
relation to other groups that may lead tax noncompliance in the group. At societal level, the
taxpayers are concerned with the fairness of tax system of the whole society, where they
perceived the tax system to be unfair, tax noncompliance is likely to increase in the society
(Kirchler, 2007).

Mason & Calvin (1984) stated perceptions of the tax system have a bearing on public
confidence in the tax system which increases tax evasion. However, the dissatisfied but honest
taxpayers and the other dissatisfied but dishonest cited deterrence activities, sanction threats
and punishments, fear of being caught and possible disclosure of their deviance acts to the
public that strongly made then to remain compliant. Wenzel (2002) the point to reach is that if
the taxpayer perceives the tax system not fair, illegitimate then difficult to achieve compliance
or in other words evasion increases. Tax evasion consists of illegal and intentional actions
taken by individuals to reduce their legally due tax obligations. Individuals and firms can
evade taxes by under reporting incomes, sales, or wealth; by overstating deductions,
exemptions, or credits; or by failing to file appropriate tax returns. For its part, government
must take actions to ensure compliance with the tax laws (James Alm1999).

Perceived tax fairness was measured basing on Gerbing (1988); Richardson, (2006); Anna et
al (2008), survey instrument which identified the five dimensions underlying tax fairness as
from Gerbing’s research. The dimensions of measurement were in terms of general fairness,
exchange with government, special provisions, tax-rate structure and self interest. The Gerbing
tax-fairness scale was used to collect information concerning tax-fairness perceptions. As
stated in Bhatia (1976), a good tax system, in order to achieve various objectives, chooses and
adheres to certain principles, which become its characteristics.

A good tax system, therefore, is one, which is designed based on an appropriate set of
principles, such as equality or fairness and certainty. According to James (2003), the most
obvious requirement of equity or fairness is to treat equal people in equal circumstances in an

15
equal way. To put it differently, it is essential that a good tax system should appear equitable
to the taxpayers. Saw, K, and Sawyer, A. (2010) found that taxpayers adjust their perceived
inequalities through tax evasion. Therefore for reaching in to judgment of tax fairness issue
looking the attitudes of taxpayers’ is quite important. The taxpayer behaves as tax fair or not
based on the attitudes he/she has framed against the tax system. Therefore the researchers
critical of equity theory claim that in a judgment on fairness, a number of other factors need to
be addressed apart from exchange (either mutual or indirect) and horizontal and vertical equity
aspect of tax fairness.

Bobek (1997) argued from the perspective of the theory of functional attitude that the motive
of the attitude will determine whether it will be positive or negative. The taxpayer, whose
motive of attitude towards tax system is to express his belief in the system, is expected to
judge the fairness of the system objectively and the taxpayer whose attitude is motivated with
what benefit to derive from the system may label tax system fair if he is benefiting from the
system. Eriksen and Fallan (1996) said that dimensions of attitude towards tax evasion
include: attitude to one’s own tax evasion which is referred to as tax ethic, fairness of tax
system, attitude to other people’s tax evasion and attitude to general crime. These study
assessing attitudes of tax payers to evade tax and attitude of other tax payers to evade tax,
when other tax payers evade the tax that influences other people to evade tax. Taxpayers may
not agree with the government’s spending policies, or if they perceive that they are not
obtaining a fair exchange from the government for their tax payments, then they are distressed,
and report less income than taxpayers who perceive equity in their exchange with the
government (Chung, 2002).

Mason & Calvin (1984) stated perceptions of the tax system have a bearing on public
confidence in the tax system which increases tax evasion. However, the dissatisfied but honest
taxpayers and the other dissatisfied but dishonest cited deterrence activities, sanction threats
and punishments, fear of being caught and possible disclosure of their deviance acts to the
public that strongly made then to remain compliant. If an individual’s tax burden is heavier
than that of comparable other individuals, tax compliance is likely to decrease.

16
 2.4.2. Believe of taxpayers toward meeting their tax obligation

According the planned behavior, the theory enlightened that the behavior produced by the
individuals get up because of the purpose to act. Although the emergence of an intention to act
is determined by three factors (Ajzen, & Fishbein, 1975), listed as (1) Behavioral Beliefs, an
individual's beliefs are the result of a behavior and an evaluation of the results,(2) Normative
Beliefs, that is beliefs about the normative expectations of others and motivation to meet these
expectations and (3) Control Beliefs, is the belief of the existence of things that support or
inhibit behavior that will be displayed and the perception of how strong the things that support
and inhibit behavior that is the supposed supremacy. Arum (2012) clarifies the theory of
planned Behavior as believed applicable to the drive of his research to explain the behavior of
taxpayers‟ to meet their tax obligations. Before an individual to do something, people will
have confidence about the results to be found from such behavior. Therefore, his question
would be decided that will do it or not do it. It is related to the awareness of the taxpayer.
Taxpayers‟, who are aware of the tax, will have confidence on the importance of paying taxes
to help preserve the country's development behavioral beliefs.

Individual tax payers‟ will have confidence about the normative prospects of others and
motivation to meet these expectations normative beliefs. If this declaration is allied to the tax,
that the existence of suitable of tax authority’s service, tax system that is efficient and
effective, and tax counseling to motivate taxpayers to obey the tax would encourage every
taxpayer has the confidence and decide to become an obedient taxpayer’s pay tax obligation.
The level of taxpayer compliance will be determined based on the taxpayer's perception of
how strong taxes penalties to support the taxpayer's tax obedient (Arum 2012).

In line with this, Mustikasari, (2007) defines behavioral beliefs, normative beliefs, and control
beliefs as the three factors that determine a person's behavior. By these three factors, then
individuals will reach the stage of intention, then the last stage is the behavior. Intention level
is the level where a person has the intention to behave, but the behavior is the one behaving.
Finally when the taxpayer has had to pay taxes awareness, driven by the authority’s services
reasonable, as well as the tax penalties then the taxpayer will have the intention to pay the
taxes and then realize that intention.

17
In addition, Motivational postures which represent the ways in which individuals position
themselves with regard to a regulatory authority and are predispositions to compliant or
noncompliant behavior (Braithwaite, et al., 1994 and Braithwaite, 1995).Some of motivational
postures in the taxation context are commitment, capture, resistance, disengagement and a
newly developed fifth posture of game playing. If a taxpayer adopts a commitment posture
towards the tax system and the tax official, it means that they feel a sense of moral obligation
to pay their taxes and pay their taxes with good will because they believe paying tax ultimately
advantages everyone. If adopting the posture of capture it means that a taxpayer may not be
happy with the tax official or tax system, but they acknowledge that it is a part of life and that
they must accept that taxes need to be paid. Capture signals an intention to be cooperative with
the tax official. Taxpayers who adopt a resistant posture are likely to view the tax official with
antagonism because they feel the tax official pushes them around. Further, these taxpayers
believe that people should take a stand against the tax official. Taxpayers who are disengaged
from the tax system are those who do not care that they are not doing the right thing by the tax
official and they believe the tax official cannot do anything to them if they choose not to pay
their taxes. Finally, taxpayers who adopt a game-playing posture enjoy the game of finding the
grey areas of tax law and the challenge of minimizing tax. In fact, they sometimes believe the
tax official respects them for being creative in their tax affairs. From the description of these
postures, it can be seen that taxpayers who adopt a committed or captured posture are more
likely to be compliant, while those who are resistant or disengaged are more likely to be non-
compliant. Game players tend to like finding the loopholes in tax law so are also more likely
to be noncompliant with the spirit of the law. This study was assessing the beliefs of tax
payers toward meeting their tax obligation.

2.4.3. Educational Level of Tax payers

Nelson Mandela, the South Africa leader, used to say that “education is the most powerful
weapon which you can use to change the world”. The aspect of knowledge that relates to
compliance is the general understanding about taxation regulations and information pertaining
to the opportunity to evade tax. Attitude towards tax compliance can be improved through the
enhancement of taxation knowledge. Poor knowledge can evoke distrust and negative attitudes

18
toward tax; whereas good tax knowledge correlates with positive attitudes toward tax
(Niemirowski et al., 2002).

Tax noncompliance is the failure of taxpayer to meet tax obligations whether the act is done
intentionally or unintentionally (James & Alley, 2004, Loo 2006; Mohani, 2001; Kesselman,
1994 and Allingham and Sandmo, 1972). Soos (1991) and Kirchler, (2007) broadly classified
noncompliance as failing to file a tax return; underreporting of taxable income; overstating tax
claims such as deductions and exemptions and failing to make timely payment of tax liability.
Previous studies have evidenced that general tax knowledge has a very close relationship with
taxpayers’ ability to understand the laws and regulations of taxation, and their ability to
comply with them (Singh, 2003).

The level of tax knowledge is of importance to the way people comprehend the reality
underlying taxation and the associated attitude to taxation that is expressed (Mohd,
2005).Misperception plays a major role shaping fairness evaluations, attitude to one’s own tax
evasion, and attitude to other people’s tax evasion (Roberts et al, 1994). Therefore biases are
likely to arise with incomplete information or incomplete knowledge. Attitudes about the tax
system and perceptions of fairness are influenced by what the public actually knows about the
tax system. Tax knowledge and perceived tax fairness have been identified as those behavioral
aspects which positively affect the taxpayers’ decision to comply. A taxpayer with good
knowledge about tax matters and who perceives the taxes to be fair is expected to comply
diligently (Joseph mukasa 2). Education, as a demographic variable relates to the taxpayers’
ability to comprehend and comply or not comply with the tax laws (Groenland and Veldhoven,
1983). Two aspects of education distinguished: “the general degree of fiscal knowledge and
the degree of knowledge involving evasion opportunities” (Jackson and Milliron, 1986). This
study does not comply with the joseph mukasa because of tax payers’ use their knowledge to
reduce income by increasing such, expenses to use loophole of tax law (gap of tax law).
Increased knowledge of tax evasion opportunities has a negative influence on tax compliance
as it assists non-compliance.

Chan et al (2000) suggested that those with a higher education level are more likely to have a
higher level of moral development and higher level attitudes toward compliance and thus will

19
tend to comply more. One of the measures to increase voluntary compliance is by assuring that
taxpayers have a certain level of qualifications, ability and confidence to exercise their tax
responsibility (Mohani, 2001). In contrast, the most recent study by Richardson (2008), cited
in Mohd, 2010 revealed that there is a negative association between education and compliance.
Increased knowledge of tax evasion opportunities has a negative influence on tax compliance
as it assists non-compliance. However, the vast majority of studies examining the impact of
education on tax evasion use a taxpayer’s general education level as the approach to measure
education (Richardson & Sawyer, 2001). Higher tax knowledge is also assumed to lead to
higher compliance rates (Carnes & Cuccia, 1996).

According to Eriksen and Fallan (1996), as the level of tax knowledge increases, the rate of
tax evasion is decreased, and the level of tax compliance becomes much higher. So the tax
payers use their knowledge to avoid tax by the law in wrong way. In addition to the above
stated factors the knowledge base of individuals regarding the types of taxes to pays a may
also matter in affecting compliances attitude whether fore control for tax knowledge which is
measured as around response for the extent of difficult to know the types of tax to pay.. Hence,
this study believes that higher knowledge is assumed to lead, the rate of tax evasion and Lead
to not compliance to tax rate.

According to Eriksen and Fallan (1996), better tax knowledge accounts, at least in part for the
improved perception of fairness and attitudes to other’s tax invasion. It is apparent that
preferences for progressivity in response to concrete questions differ significantly from
abstract questions. The taxpayer’s knowledge about taxation is said to affect the way he
perceives the equity of the tax system. Aripin and Amran (2003) while tax avoidance, denotes
the taxpayers’ creativity to arrange his tax affairs in a proper manner based on law and
regulation (any provision not violated) so as to reduce his tax bill, and this is (or should be)
acceptable in view of the tax administrator. It usually relates to a taxpayer’s ability to
comprehend and comply or not comply with income tax laws (Jackson & Milliron, 1986).
Enhancing the level of general fiscal knowledge, tax compliance improves because of more
positive perceptions about taxation. This study tries to investigate the level of education
affects the fairness of taxation by using various proclamation of taxation.

20
Tax avoidance attracts extreme views. Some see it as a great evil, placing a burden on
taxpayers who do not, or cannot, avoid tax and thus creating unfairness in the tax system.
Others see legal avoidance devices as mechanisms that enable the tax system to operate in a
competitive and efficient way: “a tax system breathes through its loopholes”. On this view,
especially in a business context, avoidance may make arrangements viable by counteracting
barriers to Commercial activity created by taxation. Which viewpoint one takes depends to a
considerable degree on one’s philosophical and political starting point (the smith institute,
1987). But this study try to assess tax payers’ makes changes their business to avoid tax or to
reduce tax by increasing such expenses to reduce tax.

Avoidance is typically accomplished by structuring transactions so as to minimize tax liability.

In some cases, avoidance is encouraged by legislation granting favorable tax treatment to
specific activities in contrast to general taxation principles. From a legal standpoint, evasion
differs from avoidance in being unlawful, and hence punishable (at least in theory). As far as
economic function is concerned, however, evasion and avoidance obviously have very strong
similarities; sometimes, indeed, they can hardly be distinguished (see for instance Feldman
and Kay, 1981; Cowell, 1990; McBarnet, 1992). Tax compliance may be seen in terms of tax
avoidance and tax evasion. The two activities are conventionally distinguished in terms of
legality, with avoidance referring to legal measures to reduce tax liability and evasion to
illegal measures. James (2000) describes tax avoidance as the legal manipulation of an
individual’s affairs in order to reduce tax. The study believe that, Tax payers avoid taxes by
using their education level by using different mechanism to reduce tax liability by diverting to
avoid tax. Individuals do not like paying taxes, and they take a variety of actions to reduce
their tax liabilities. Some of these actions can be classified as tax avoidance or the legal
reduction in tax liabilities by practices that take full advantage of the tax code, such as income
splitting, postponement of taxes, and tax arbitrage across income that faces different tax
treatment (James Alm1999).

2.5. Taxation in Ethiopia

For a long period of time, tax administration in Ethiopia was an appendage of ministries that
did not have administrative specialization over the assessment and collection of taxes the

21
Ministry of Trade and Industry before the Italian occupation (1936) and the Ministry of
Finance after the Italian occupation (1941) (Tadese lanicha2000). Administrative units or
departments within these Ministries were charged with tax administration. The preferred mode
of organization was the organization of administrative units around the types of taxes rather
than the functions of tax administration. One mode of organization that prevailed for a long
time was an organization of tax administration units or departments for assessment and
collection of taxes on international trade (customs duties, sales and excise taxes on imports
and exports) and another one for domestic (internal) taxes or revenues (income taxes, sales and
excise taxes, stamp duties on domestic transactions). The administrative units for assessment
and collection of international trade taxes were organized under the “customs departments” or
“customs authorities” while those for the administration of domestic taxes were organized
under “inland revenue departments” or “inland revenue authorities.” There were also times
when specific taxes had their own tax administration units or departments within the
Ministries (e.g., income tax departments, excise tax departments).

The separation of tax administration for domestic and international transactions had the effect
of parallel tax administrations for those taxes that were levied on both domestic and
international transactions. For example, customs departments or administrations assessed and
collected sales taxes on imports and Inland Revenue Departments assessed and collected sales
taxes on domestic transactions. (Tadese lanicha 2000). With the establishment of the Federal
Government Revenue Board in 1995, Ethiopian Tax Administration was for the first time
organized as a separate and autonomous government body (Tadese lanicha2000).

The most recent reorganization and restructuring of tax administration which occurred in 2008
merged the three revenue agencies of the Federal Government into one authority the Ethiopian
Revenues and Customs Authority (ERCA) (Tadese lanicha2000). This reorganization of
Federal Tax Administration has relegated the task of tax administration from ministerial level
to an authority but in substance, the reorganization has in fact strengthened the powers of the
Tax Authority. Recent tax administration reforms have introduced a number of changes to
Ethiopian tax administration, only some of which are mentioned here under for their
instructive value.

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 2.6 The Ethiopian Tax Reform of 2002 and 2008

Since 1992/93, the Government of Ethiopia has made a major economic policy shift from
central planning to market oriented economic system. In line with this change, a series of tariff
and tax reform measures have been taken. The reasons to these were: outdated tariff and tax
laws; weak customs and tax administration; failure of tariff and tax regime to attract
investment, to facilitate trade and to generate adequate revenue to cover current and capital
expenditure, and hence finance development and poverty reducing project. So that, the 2002
Income Tax Proclamation governs income tax from employment, from rental of buildings and
from business. The low applies a progressive tax rate, except for corporate tax, which is flat
30%.However, the amount of income and the corresponding tax rate has been static for more
than a decade, despite inflation. And also, things are changing quickly and the business
environment is getting more dynamic. As a result taxpayers were forced to bear unnecessarily
heavier tax burden. Addressing these and other issues and keeping pace with the changing
environment in Ethiopia and internationally was essential. It has become necessary to
introduce modern and efficient tax system that supports the economic development and which
is in accord with the level of economic development achieved so far; whereas, it is essential to
make the tax system fair and bring income that are so far not subject to tax net. Major reform
was made on income tax proclamation, tax administration, business registration and licensing
proclamation. The three major taxes and their respective Tax Reforms are explained below:

A. Taxes on Income and Profit

Tax on employment income used to be guided by Income Tax Proclamation No. 173/1961. In
the 1990s, this proclamation was amended with modifications to the legislation regulating
income tax on employment: rural land and agricultural income tax; rental income tax; taxes on
business and other profits; tax on income from mining activities; capital gains tax, and taxes
on other sources of income such as chance wining (which carries a tax rate of 15 per cent),
royalties(with a tax rate of 5 per cent) and tax on non-resident persons offering services in
Ethiopia (which carries a tax rate of 10 per cent). This reform resulted in a schedule for
marginal tax rate which is currently being applied to income exceeding Birr 150, the assumed
minimum wage rate. Compared to the marginal tax rate of 89 per cent during the military

23
(Dergue) period; the current reform which reduced the maximum marginal tax rate to 35 per
cent was quite radical. The 1978 income tax for rural land and agricultural activities was also
amended in 1995 and 1997. For land use, farmers are now taxed Birr 10 for the first hectare
and Birr 7.5 for each additional half hectare. Moreover, annual income exceeding Birr 1,200 is
subject to a progressive tax rate. The land use fee for state farmers is Birr 15 per hectare. A
novel aspect of the latest tax policy concerning the agricultural sector is the fact that an
agricultural investor is exempted from income tax for two consecutive five- year periods. A
Progressive marginal tax rate schedule was also enacted in 2002 for income derived from the
rent of houses (including manufacturing plants). Whereas ,the new income tax proclamation
no 979/2008 E.C or 979/2016, states that monthly employee incomes of up to Birr 600
exempted from paying personal income tax, rental income tax( with new rental building
notification) and tax on business and other profit incomes of up to Birr 7,200 exempted from
paying tax. The tax rate for income tax ranging from 0 to 35 per cent. Whereas the rate of
business income tax applicable to body is flat 30 per cent.

B. Tax on Goods and Services

The reform in this category refers to Excise Tax Proclamation (No. 68/193, 77/1997, and No.
149/1999), and the applicable tax rate ranges from a low of 10 per cent on textiles and
television sets to 100 per cent for alcohol, perfumes and automobiles. Sales tax on goods
constitutes the second category and these ranges from 5 per cent (mainly for agricultural
goods) to 15 per cent. Many basic goods are exempt from taxation. The reform also introduced
a 5 per cent tax rate for work contracts and financial services, while a 15 per cent rate is
applied to the sale of other services. Valued-added tax (VAT) was introduced in January 2003
and may mean a shift from Ethiopia’s dependence on foreign to domestic trade, but it is too
early to evaluate its impact. It is not, however, difficult to see that its implementation is a
challenge, owing to the predominance of small and informal operators in the country, its
history of tax evasion and corruption, lack of standard recordkeeping systems as well as the
lack of knowledge about VAT and a tax-base for its computation.

C. Taxes on International Trade

The reform of taxes on international trade relates to levies on imports (customs duty, import
excise tax, import sales tax) and tax on exports. The custom tariff reform that took place

24
between 1993 and 2002 grouped imports into 97 categories based on the Harmonized System
of Tariffs Classification Code. An ad valorem rate ranging from 0 to 35 percent was
introduced. The same rates were applied for import excise and sales taxes as those established
for goods and services. An important development in the export sector was the abolition of all
export taxes, with the exception of coffee. Similarly, to encourage exports, schemes for duty
drawback and duty free imports were implemented. Other miscellaneous tax-related reforms
have been carried out in the last decade. These include the amendment of stamp duties
(Proclamation No. 110/1998); the introduction of a 3 per cent withholding tax (Proclamation
No. 227/2001), a 2 per cent withholding tax on income (Proclamation No. 227/2001), as well
as a 5 per cent withholding tax on interest income (Proclamation No. 227/2001).These all
revisions and modifications were not generated the expected revenue over the period under
review.

2.6.1 Record Keeping

Category "A" and "B" taxpayers shall maintain the following records and accounts:

1. Category "A" taxpayers shall keep book of account prepared in accordance with the
financial accounting reporting standards and at the end of the tax year submit to the
Tax Authority a balance sheet and profit and loss statement and the detail record of
the taxpayers business assets and liabilities, daily income and expenditure, all
purchases and sales of trading stock, and service provided and received by taxpayers
and trading stock on hand at the end of tax year.
2. Category "B" taxpayers shall at the end of the year submit to the Tax Authority profit
and loss statement and liable for business income tax to keep the following:
o A record of daily income and expenditures;
o A record of all purchases and sales of trading stock;
o A salary and wages register; and
o Any other document relevant in determining the tax liability of the
taxpayer.
3. All entries in the records and account referred to in sub-Article 1 and 2 here of shall
be supported by appropriate pre numbered vouchers. (Income Tax Proclamation No.

25
 286/2002 or 286/1994 EC and its amendment Income Tax (Amendment)
Proclamation No. 608/2008 or 608/2001 EC or 983/2008 E.C).

2.6.2 Declaration of Tax

A Category “A” or Category “B” taxpayer shall file a tax declaration for a tax year within:

1. for Category “A” taxpayers,4 months from the end of the tax year, or
2. for Category “B” taxpayers, 2 months from the end of the tax year.

2.6.3 Payment of Tax

Category “A” or Category B taxpayers shall be due on the date that the taxpayer’s tax
declaration for the year is due, Category C taxpayers shall pay the tax determined in
accordance with standard assessment on the 7th day of July (1st of Hamle) to the 6th day of
August (30th of Hamle) each fiscal year.

o For example (as is the case usually), if a taxpayer follows the fiscal year, the one-year
period from 1st of Hamle to 30th of Sene (8th of July to 7th of July), the income has to
be declared and paid till 5th of Pagume (or 6th of Pagume during a Leap year
according to the Ethiopian calendar (that is 10th of September or 11th of September
during a Leap year according to the Ethiopian calendar). Income Tax Proclamation No.
286/2002 or 286/1994 EC and its amendment Income Tax (Amendment) Proclamation
No. 608/2008 or 608/2001 EC or 983/2008 E.C.

2.7. Taxpayers Obligations

A. Late Filing
A person who fails to file a tax declaration by the due date shall be liable for a late filing
penalty of 5 % of the unpaid tax for each tax period or part thereof to which the failure relates,
provided that the penalty to be so imposed shall not exceed 25% of the unpaid tax. The penalty
to which a tax payer is liable for non-filing of tax declaration for the first tax period or part
thereof under sub-article (1) of this article shall not exceed 50,000 birr (Fifty Thousand Birr).
B. Late Payment

26
A person who fails to pay tax by the due date shall be liable for a penalty equal to 5% of the
un paid tax that remains unpaid at the expiration of one month or part thereof after the due
date; and an additional 2% of the amount of the unpaid tax for each month or part of a month
thereafter to the extent that the tax remains unpaid.
C. Tax Evasion

A person with the intention to evade tax, conceals his income or fails to file a tax declaration
or pay tax by the due date shall be punishable with a fine of birr 100,000 (One Hundred
Thousand Birr) to 200,000 (Two Hundred Thousand Birr) and rigorous imprisonment for a
term of three to five years. A withholding agent who withholds tax from a payment but fails to
pay the withheld tax to the Authority by the due date with the intention to evade tax shall be
punishable by rigorous imprisonment for a term of three to five years.

D. False or Misleading Statement and Fraudulent Document

A person who provides fraudulent documents shall be punishable with a fine of birr 50,000
(Fifty Thousand Birr) to 100,000 (One Hundred Thousand Birr) and rigorous imprisonment
for a term of three to fifteen years.

2.8. Dimension of Tax Fairness

There is limited literature that observes how taxpayers evaluate a fair tax system. The
literatures that do observe tax fairness found it difficult to define. Christensen et al. (1994)
indicated that fairness is difficult to define because of four problems: (1) it is
multidimensional, (2) it can be defined at the individual level or society at large, (3) fairness is
intertwined with complexity and (4) a lack of fairness may be perceived justification or a
cause of noncompliance.

Many researchers (e.g. Porcano, 1984; Richardson & Sawyer, 2001; and Jackson & Milliron,
1986) agree that tax fairness is a multidimensional concept.

The earlier review of various theories and studies of fairness suggests approximately ten
dimensions of fairness (for example; Gerbing, 1988; Richardson, 2005; and 2006; Azmi and
Perumal, 2008). However, in this study, six dimensions identified to be important. The

27
dimensions are (a) general fairness, (b) exchange fairness, (c) horizontal fairness, (d) vertical
fairness (measured by ability to pay), (e) personal fairness, and (f) administrative fairness

a) General fairness and distribution of the tax burden; this seeks to explain the overall
fairness of the tax system and the distribution of the tax burden
b) Exchange with government; this dimension is concerned with reciprocal exchange
between taxpayers and the government
c) Horizontal fairness deals with equal tax treatment among taxpayers in similar
economic positions.
d) Vertical fairness based on the ability to pay principle and preference for tax rate
structure, either a flat rate or progressive rates.
e) Personal fairness leads to individuals‟ judgments about whether the income tax system
is favorable to them.
f) Administrative fairness relates to the content of the tax law (policy fairness) and
procedures employed by the tax authority (procedural fairness).

In the context of the income taxation, individuals may focus on evaluating the fairness of tax
burdens in terms of the amount of taxes they pay relative to benefits they receive from
government (Kinsey et al, 1991). If society does not offer enough (tax funded) resources
compared to the amount of tax one must pay, this may lead to feelings of exchange inequity
(Peter & Dijke, 2007).

Taxpayers may not agree with the government’s spending policies, or if they perceive that
they are not obtaining a fair exchange from the government for their tax payments, then they
are distressed, and report less income than taxpayers who perceive equity in their exchange
with the government (Chung, 2002).

28
 Attitudes of Taxpayers

Beliefs of Taxpayer toward their

tax payment

Educational level of Taxpayers Fairness of

Taxation
System

Gender of Taxpayers Syste

Age of Taxpayers

Figure 2.1: The Conceptual framework of the Study

Source: Researcher own construction based on different literature, 2017

29
 3 RESEARCH METHODOLOGY

3.1. Description of the Study Area

Dire Dawa Administration is located in the eastern part of Ethiopia. It occupies a total area of
1558.61km2 with a total population estimated to be 341,834 according to Dire Dawa
Administration Statistical abstract. The administration is 505km far from Addis Ababa. The
administration is divided into 38 rural kebeles and 9 urban kebeles. Regarding its boundary it
shares borderline with east Hararghe zone of Oromiya region and Shinle zone of Somali
region. Ethnically, the population of Dire Dawa is composed of different ethnic groups; the
major ones are Oromo, Amhara, Somali, Gurage, Harari and Tigre. Climatically, the region is
hot and dry. The average annual temperature of the region is 32.20C and the annual average
rainfall is 618.3mm. Dire Dawa town is strategically located between Addis Ababa and
Djibouti and serves as a transit and terminal both for import and export trades. The city has
accessibility to various infrastructural facilities such as international airport, railway and road
transport. In addition to these, there are well organized electric power supply, digital telephone
connection, and broad band Internet service, well- equipped custom and transit service etc.
The administration is directly accountable to the Federal Government and it is administered by
a mayor who has council of cabinet members (the executive body). Currently the mandate of
tax administration is given to the Tax Authority of the administration which is accountable to
Finance and Economic Development Bureau. The authority was established by proclamation
as an independent agency with the mandate of city’s revenue administration. The authority has
a manager and there are five divisions and a legal service which are directly accountable to the
manager. There are 106 employees of tax authority in Dire Dawa administration (2008 E.C).
The organizational structure of the authority is depicted in diagram(see Appendix 3)

3.2. Data Sources

The type of data required to undertake this study were cross- sectional type having both
qualitative and quantitative nature. There are three major research approaches in any academic
research. These approaches are qualitative research approach, quantitative research approach

30
and mixed approach. At the conduct of the research, I have to take in to consideration what
research philosophy or knowledge claim they have to undertake.

The main goal of this study was not only to collect sufficient tax from taxpayers but to enable
fair tax from the selected four kebeles and the researcher believe that it will give him best
result, especially when it comes to finding answer to the research questions. The study was
used mixed research approached. Because, McKerchar (2010) argues that, the combination of
both quantitative and qualitative methods is a more pragmatic approach to gain a better
understanding of the phenomenon under study.

For the purpose of this study, survey design was believed to be appropriate since survey
design provides a quantitative or numeric description of trends and attitudes of a population by
studying a sample data with the intention of statistically generalizing to the population under
investigation (Creswell, 2003).

3.3. Sampling Techniques

The target population for this study has been category “B” taxpayers in four urban kebeles out
of nine in Dire Dawa Administration. According to 2016 G.C total category “B” taxpayers
registered in Dire Dawa tax Authority were about 1232. For selecting the sample, data
sampling requires to first randomizing the total population in to nine kebeles, then after,
purposive sampling was applied to select four urban kebeles sample of category “B” taxpayers
from the nine kebeles based on the list of category “B” taxpayers containing their respective
business sector and density. So there are around 824 category “B” taxpayers in these four
urban kebeles in Dire Dawa administration. Finally, stratified random sampling was used to
select target population.

3.3.1. Sample Size

This study used 269 samples of category “B” taxpayers from the total population of 824 in
four urban kebeles were the sampling frame. It used stratified sampling technique and the
sample size and representative of the target population was calculated by statistical formula.
The mathematical formula developed by Yamane (1967).

31
 n= N
1 + N (e) 2
Where n=is the sample size
N=is the population size
e=permitted error (0.05 is equal to P of 95% confidential level)

Therefore, using the above statistical formula, the sample size of study is computed as follows:

n=N/ 1+ N (e) 2 = 824/1+ 824(0.05) 2

n= 824/1+2.06 =824/3.06 = 269. 28 ~ 269 (i.e. due to round of decimal)

The proportional systematic sampling for the four Kebeles has been determined by
n/N=269/824=0.3264 which means that 32.64% of each Kebele taxpayer is taken as a sample.

The following table shows the sampling frame of the study.

Table 1: The distribution of category “B” taxpayers in sample Kebeles.

Ser.No Kebeles Population Sample Percentage

1 Sabean(O2) 215 70 32.64

2 Gendekore(O4) 123 40 32.64
3 Megala(O6) 144 47 32.64
4 Taiwan(O7) 342 112 32.64
Total 824 269 32.64

The survey covers 269 samples of taxpayers from 824 target category “B” taxpayers. The
questionnaire has been given to 269 taxpayers who are participating in giving relevant
information of the question.

3.4. Method of Data Collection

In this study, both primary and secondary data were used. Primary data were collected from
respondents using self-administered questionnaire and in-depth interview. The questionnaire
was divided into five parts with the intention of extracting information to address the research

32
questions. The first part comprises questions pertaining to the samples respondents’
demographic information.
The second part consists of questions related to attitude of taxpayers. The third part consists of
questions related to belief of taxpayers toward their tax payment. The fourth part consists of
questions related to educational level of taxpayers and the last part consists of questions
related to fairness of tax system.

The secondary data were collected from published and unpublished documents of organization
like, Dire Dawa administration annual plan, reports of taxing authority, and government
documents, journal, website, varieties of books and internet libraries.

This study used semi-structured and self-administered questionnaires and interview. The
questionnaires were prepared both in English language and Amharic language to non- English
speaker respondents. The questionnaire comprised of both closed and open ended questions.
The popularity of the closed-ended questions provides less effort by respondents to complete
the questionnaire and it is easy for analysis. Most of the closed ended questions are designed
on a 5-point likert scale, multiple-choice single-response of strongly agree to strongly
disagree. Adding open ended questions allows respondents to offer answers that the researcher
didn’t include in the questions. The replies of open-ended questions were analyzed by content
under different categories, and in-depth interview to provide more information to the data were
obtained through the survey questionnaires.

3.5. Methods of Data Analysis

The data were analyzed using both descriptive analysis and econometric models. Descriptive
analysis tools such as mean, standard deviation, frequencies and percentiles were used.
Correlations and multiple regression analysis were used to address the three specific
objectives. Finally analysis of the data collected was done using statistical package for social
scientists (SPSS) version16.

33
 3.5.1. Correlation

In statistic, correlation, (often measured as a correlation coefficient), indicates the strength and
direction of a linear relationship between two random variables. In general, it refers to the
departure of two variables from independence. A number of different coefficients are used for
different situations as mentioned by Coakes and Steed (2007).

The best known is the Person product-moment correlation coefficients, which is obtained by
dividing the covariance of the two variables by the product of their standard deviations.
Person’s correlation reflects the degree of linear relationship between two variables. It ranges
from +1 to-1.

A correlation of “+1” means that there is a perfect positive linear relationship between
variables and a correlation of “-1” means that there is a perfect negative linear relationship
between variables. A correlation of “0” means there is no linear relationship between two
variables.

3.5.2. Multiple Regressions

According to Coakes and Steed (2007), multiple regressions are extensions of bivarite
correlation. They state that the result of regression is an equation that represents the best
prediction of a dependent variable from several independent variables. Regression analysis is
used when independent variables are correlated with one another and with the dependent
variable. This method is used to determine if the independent variables will explain the
variance in dependent variable.

Regression Functions
The equation of regressions in this study was generally built around two sets of variables,
namely dependent variable (fairness of tax system) and independent variables (attitude,
beliefs, and educational level of taxpayers) and to find out the demographic variables, such as
gender and age shows differences in the fairness of tax system. The basic objective of using

34
regression equation on this study is to make the study more effective to describe, understand
and predict the stated variables.

Regress tax fairness on (attitude of taxpayers, beliefs of taxpayers, educational level of

taxpayers, sex of taxpayers, age of taxpayers) variables.

FairT = β0+ β1ATT + β2BLT + β3 EDL + β4ST + β5AGT+ ei

Where:
FairT is the response or dependent variable – fairness of Taxation
ATT= Attitude of taxpayers, BLT= Beliefs of taxpayers towards meeting their tax obligation,
EDL=Educational level of taxpayers are the explanatory variables, where as ST= Sex of
taxpayer’s, AGT= Age of taxpayers, which are dummy and continuous variable respectively.

β0 is the intercept term- constant which would be equal to the mean if all slope coefficients are
0. β1, β2, β3, β4 and β5 are the coefficients associated with each independent variable and
demographic factors which measures the change in the mean value of FairT, per unit change in
their respective independent variables.

Accordingly, this statistical technique was used to explain the following relationships.
Regress fairness of taxation (as dependent variable) on the selected linear combination of the
independent variables using multiple regression.

3.5.2.1 Model

Fairness of tax system is measured through nine items. The responses range from ‘strongly
agree’ = 1 to ‘strongly disagree’ = 5. The average score over the nine items were taken as an
index for tax fairness.

35
 3.6. Reliability Test

In statistics, reliability is the consistency of a set of measurements or measuring instruments,

often used to describe a test. There are several different reliability coefficients. One of the
most commonly used is called Cronbach’s Alpha. Cronbach’s Alpha is based on the average
correlation of items with in a test if the items are standardized. It was first named as Alpha by
Cronbach (1951), as he had intended to continue with further instruments.

3.7. Ethical Considerations

Ethics are norms or standards of behavior guiding moral choices about our behavior and
relationships with others, therefore, in research, ethical considerations aim to ensure that no
individual suffers adverse consequences or is harmed (Leedy & Ormrod, 2013). The basic
ethical principle of autonomy, beneficence and justice (Marshall & Rossman, 2011) was
incorporated in this study by means of maintaining confidentiality of information and of
respondents.

36
 4. RESULTS AND DISCUSSIONS

The previous chapter presented the methodology used in the thesis. More specifically, the
chapter was showed the different research approaches, methods of data collection, and analysis
adopted in the study.

This chapter contains discussion and analysis of finding of the study. It presents the findings
related with the study objectives, which includes the assessment of the relationship between
fairness of taxation system and attitudes of taxpayer’s, fairness of taxation and beliefs of
taxpayers and tax fairness, educational level of taxpayers and impact of demographic
variables, such as age and gender perception on fairness of tax system.

Accordingly, this chapter is arranged into three sections; the first section (4.1) presents the
results of the different data sources(4.2) presents in-depth interview results and the contents
analysis of open ended questions. Analysis of measures, multiciollinearity test, correlation and
multiple regression analysis result were presented under section (4.3).

The data were collected and then analyzed in response to the problems posed in the first
chapter of this study. The findings are based on the responses of sampled taxpayers with the
help of a semi-structured questionnaire in the study area.

4.1 Research Results

One of the purposes of this study is to investigate factor affecting the fairness of taxation
system with respect to category “B” taxpayers residing in Dire Dawa Administration. The
principal data collection methods to this end were the survey and in-depth interview conducted
to Dire Dawa Administration category “B” taxpayers. The following discussion presents the
results of the survey and in-depth interview, therefore, in section 4.1.1 presents survey results
while in section 4.2.1 presents in-depth interview result and 4.2.2 presents content analysis
result.

37
 4.1.1 Survey results

In light of the above idea, the purpose of this section is to show the results from survey that
conducted in Dire Dawa Administration category “B” taxpayers. Therefore, it covers the
response rate in section 4.1.1.1., the respondent’s profiles in section 4.1.1.2, investigation of
taxpayer’s attitude towards the fairness of taxation system in section 4.1.1.3, investigation of
beliefs of taxpayers to meet their tax obligations and fairness of taxation system in section
4.1.1.4., and in section 4.1.1.5 it covers fairness of taxation system and educational level of
taxpayers.

4.1.1.1. Response rate

The survey was conducted between January and February 2017.Questionniares was distributed
to 269 randomly chosen category “B” taxpayers. All the taxpayers‟ survey respondents were
located in Dire Dawa Administration. A one-week return date was requested. To increase the
response rate, follow-up reminders, and alternatively, telephone call reminders were made to
the representatives requesting them to remind them to return the questionnaires. Out of this
sample, 219 questionnaires were returned, making a response rate 81%. From the total
questionnaire returned, 19 questionnaires were excluded from the study for incomplete
responses. One possible reason for not completing the questionnaires is the subject of research
itself (taxation) considered as difficult subject. This is based on the comments given by the
sample in the blank response section of the questionnaire: unable to supply answers as I have
little knowledge of taxes, etc. This left the study with 200 usable questionnaires for data
analysis. This shows that the response rate considered as fair. Dillman( 2007) suggests that the
response rate for a personal delivery approach varies considerably from the lower of 28
percent to the highest of 50 percent.

Table 4.1: Response rate

Particulars Frequency Percentage
Responded 219 81
Non responded 50 19
Total 269 100
Source: Taxpayers survey
38
From the semi structured questionnaires distributed to respondents, 81% of them returned,
whereas the remaining did not (Table 4.1).

4.1.1.2. Respondents’ profile

According to Income Tax Regulation No. 78/2002, there are different categories of business
sectors. For this study, the sectors distribution of respondents was summarized in Table 4.2.
As per the outcomes of the survey, about 61.5 percent of the respondents were engaged in
merchandise/trading activities, while 34.5 and 4.0 percent were to be engaged in service and
manufacturing sectors respectively.

Table 4.2: Sectors distribution survey of respondents

What is your main business sector

Frequency Percent Valid Cumulative
Percent Percent
Manufacturing 8 4.0 4.0 4.0
General merchandise and 123 61.5 61.5 65.5
trade
Service 69 34.5 34.5 100.0
Total 200 100.0 100.0
Source-data from survey and SPSS

In respect of knowing the position of the respondent in the sector, the result showed that about
55.0 percent and 25.5 percent of them were owners and managers respectively, while 16.5
percent and 3.0 percent of the respondents were accountant and others respectively (Table 4.3)
Table 4.3 Respondents’ positions

What is your position in the sector

Frequency Percent Valid Cumulative
Percent Percent
Owner 110 55.0 55.0 55.0
Manager 51 25.5 25.5 80.5
Accountant 33 16.5 16.5 97.0
Others 6 3.0 3.0 100.0
Total 200 100.0 100.0
Source-data from survey and SPSS * others like

39
The table 4.4 shows that the male respondents were dominant, comprising 74.5 percent and
females were 25.5 percent of the total respondents. This high ratio of males reflects the
structure of income earners in the study area. That is the case in most developing countries,
including Ethiopia, husbands and single males are responsible for the earning of income and
providing money for wives to purchase goods and services for household uses. This may be
due to cultural influences that females are not capable of running a business and their
participation in different business sectors is very minimal as compared to that of males.

Table 4.4 Gender of respondents

Gender of respondents
Frequency Percent Valid Cumulative
Percent Percent
Male 149 74.5 74.5 74.5
Female 51 25.5 25.5 100.0
Total 200 100.0 100.0
Source-data from survey and SPSS

Table 4.5 shows the age groups of the respondents. Since the study emphasized on category
“B” taxpayers, a minimum age of 21 years old was considered reasonable. There were five age
groups involved in this study with a 10-year range in each group. The largest group of the
respondents, (104 or 52.0%) was aged between 30 and 39 years and respondents in the group
of 60 and 69 years constituted the lowest number with 6 responses (3.0%). Generally,
respondents within the age group of 30 and 69 made up the largest portion with 170 (85%) of
the total respondents.

Table 4.5 Age of respondents

Age of respondent Frequency Percent Valid Cumulative
Percent Percent
<30 30 15.0 15.0 15.0
30-39 104 52.0 52.0 67.0
40-49 50 25.0 25.0 92.0
50-59 10 5.0 5.0 97.0
60-69 6 3.0 3.0 100.0
Total 200 100.0 100.0
Source-data from survey and SPSS
40
In case of the educational qualification of respondents, the survey revealed that about 42.5
percent had Diploma while 19.0 percent had a Bachelor Degree. Nearly 15.5 percent of
respondents indicated that they had completed grade 12, while 12.0 percent, 8.0 percent and
3.0 percent were below grade 12, had certificate and second degree respectively (Table 4.6)

Table 4.6 Respondents educational background

What is your education level

Frequency Percent Valid Percent Cumulative
Percent
Below high school 24 12.0 12.0 12.0
High school 31 15.5 15.5 27.5
Certificate 16 8.0 8.0 35.5
Diploma 85 42.5 42.5 78.0
Degree 38 19.0 19.0 97.0
Master degree 6 3.0 3.0 100.0
Total 200 100.0 100.0
Source-data from survey and SPSS

As shown in table 4.7, 41.0 percent of the taxpayers were existed for 8-10 years ,while 24.5
percent of taxpayers were existed for 5-7 year and 20.0 percent and 14.5 percent existed for
less than or equal to 4 years and 11 years and above respectively. So, almost majority of the
respondent taxpayers operated for 5 years and above. Hence, have good experience on
taxation system and the fairness of the system.

Table 4.7 Year of business existences

For how long has this business been in existences
Frequency Percent Valid Cumulative
Percent Percent
<= 4 years 40 20.0 20.0 20.0
5 -7years 49 24.5 24.5 44.5
8-10 years 82 41.0 41.0 85.5
11 years and above 29 14.5 14.5 100.0
Total 200 100.0 100.0
Source-data from survey and SPSS

41
 4.1.1.3 Attitude of taxpayers toward the fairness of taxation

With respect to attitudes of taxpayers towards the fairness of taxation system, different
questions were asked. One of the questions inquired about the respondents’ attitude was
whether the tax amount paid are based on their ability-to pay or not, of the total respondents
68.5 percent responded that the tax is not fair and not based on their ability-to pay (table 4.8).

Table 4.8 Tax fairness and ability to pay taxes

Fairness of tax system Frequency Percentage
Yes( fair) 63 31.5
No (unfair) 137 68.5
Total 200 100
Sources: data from survey and own computation

On the other hand, regarding whether the taxpayers know why they are paying tax to the
government, 92.0 percent of the respondents responded yes, while 8.0 percent said they don’t
know (table 4.9).

Table 4.9 Reasons for taxpayers’ why they pay tax

Reasons Frequency Percentage

Yes ( I know) 184 92
No (I don’t know) 16 8
Total 200 100
Sources: data from survey and own computation

As Table 4.10 revealed, 20.5 percent of taxpayers responded that they believe that taxpayers
with equal status pay equal amount of taxes while the remaining 79.5 percent of the
respondent responded that they don’t believe, which shows the unfairness of the taxation
system.
Table 4.10 Reasons for every equal status taxpayers pays equal amount of tax
Reasons Frequency Percentage
Yes(I believe) 41 20.5
No (I don’t ) 159 79.5
Total 200 100
Sources: data from survey and own computation

42
Attitude of taxpayers’ towards taxation system is crucial for any tax system’s success toward
compliance. Perceptions of taxpayers’ compliance are influenced by many variables such as
education, age, gender, norms, self-interest, complexity, fairness, audit rate, tax rate, peer
reporting and tax administration. These variables can provide critical judgments to develop
methods to increase compliance. Tax fairness is one of the variables that have attracted
researchers to discover the extent influence the variable make in fostering non-compliant
behavior, (Wenzel, 2007). The effort was also made to calculate the mean and standard
deviation of the result as well.

As can be seen from table 4.11, the respondents were asked whether everyone’s responsibility
to pay the correct amount of tax. The majority 193(96.5%) of the respondents agree or
strongly agree that everyone is responsibility to pay the correct amount of income tax.

About 28.5 percent and 15.5 percent of the respondent responds disagree and strongly disagree
that they do not receive fair value from the government for the income tax paid respectively,
25.0 percent, 6.0 percent and 25.0 of the respondents responded neutral, strongly agree and
agree respectively, if taxpayers perceive that they are not obtaining a fair exchange from the
government for their tax payments, then they are distressed, and report less income than
taxpayers who perceive equity in their exchange with the government (Chung, 2002).

Further the table 4.11, reports that 56.0 percent respondents replied the authority doesn’t give
equal consideration to all taxpayers., hence leading taxpayer’s to perceive negatively that
affect tax fairness. 49..5 percent believe that tax revenues are not spent on to achieve social
goals, 20.0 percent neutral and 22.5 percent 8.0 percent are agree and strongly agree
respectively. Theoretically tax revenue is used to finance services provided by the government.
This might be practically true, but the public must be made aware of these social services
which are being financed by the taxpayers’ money. As long there is a gap in communicating
these facts to the public the above attitude problem will not be changed in return affect tax
fairness.

On the other hand, the majority of the respondents (44.0 percent) indicated that tax system is
not consistent across years and taxpayers, 28.0 percent, 25.0 percent and 3.0 percent said

43
neutral, agree and strongly agree respectively. When respondents asked about their beliefs that
everyone pays fair share of income tax under the current income tax system, 27.5 percent and
25.0 percent of respondents responded disagree and strongly disagree respectively, which
indicate that everyone pays unfair share of income tax under the current income tax system,
where as 21.5 percent, 20.0 percent and 6.0 percent of respondents responded neutral, agree,
and strongly agree respectively. On the other hand, significant number of respondents (55.0
percent) said that compared to other taxpayers, they don’t pay more than their fair share of
income taxes. Specifically with respect to the tax rates, the survey outcomes revealed that
about 33.0 percent, 22.0 percent, 14.0 percent, 20.0 percent and 11.0 percent of respondents
indicated that the tax rates as perceive strongly disagree, disagree, neutral, agree and strongly
agree respectively (see Appendix 4 for details).

From this response it is clear that the tax rate is not based on the ability-to-pay principle or it is
perceived to be unfair by taxpayers. Even though the principle says, tax should be based on the
ability- to pay; the problem here is in determining this ‘ability’ for each taxpayer.

Table 4.11 Descriptive statistics on attitude of taxpayers towards the fairness of the taxation
system

Std.
Statement N Mean deviation
It is everyone’s responsibility to pay the correct amount of tax 200 4.54 0.763
I receive fair value from the government in return for my income 200 2.78 1.162
tax paid (e.g. benefits)
Tax authority gives equal consideration to all taxpayers. 200 2.72 1.307
I believe that the government utilizes a reasonable amount of tax 200 2.70 1.236
revenue to achieve social goals, such as the provision of benefits
for lower income families
The administration of income tax system by taxing Authority is 200 2.74 1.061
consistence across years and taxpayers
I believe everyone pays their fair share of income tax under the 200 2.66 1.192
current income tax system.
Compared to other taxpayers, I pay more than my fair share of 200 2.99 1.121
income taxes.
I think other taxpayers pay fair tax. 200 2.66 1.200

44
Penalties are the most appropriate tool for improving tax fairness 200 2.16 1.228
Valid N (listwise) 200

Overall Average 200 2.88 1.14

Source: SPSS output from survey result of 2017

On the other hand, when respondents were asked about how they think about other taxpayers
about the payments of fair tax, 47.0 percent of them said that majority of taxpayers were not
paying fair tax compared with each other, because, those who are within the same income
level pays different amount of tax. This implies that there exists unfair application of taxation
system while other taxpayers pay fair tax. To know the presence of penalties improve tax
fairness were asked and the respondents answered that 73.5 percent strongly disagree and
disagree, 22.0 percent agree and strongly agree and the reaming 4.5 percent were neutral. We
understood that, penalties are not the most appropriate tool for improving fairness of the
taxation system rather than motivating and educating taxpayers toward becoming the
responsible citizens’. That improves fairness of taxpayers (see Appendix 4 for details).

4.1.1.4 Beliefs of taxpayers toward meeting their tax obligations

According to the responses of the respondents with respect to the public beliefs about fair
taxation, 4.5% said that the beliefs of the taxpayers towards fair taxation is excellent, 30% said
it is good, 24.5% said it is fair, and 41% of them said it is poor. Generally, this response
indicates a more or less encouraging result. On the other side, the beliefs of the taxpayers are
still under question mark even though the ratio does not take the major share. Hence, it calls
for further action from tax authorities (table 4.12).

Table 4.12 Reasons for taxpayers beliefs towards fair taxation system
Beliefs of taxpayers Frequency Percentage
Excellent 9 4.5
Good 60 30
Fair 49 24.5
Poor 82 41
Total 200 100
Sources: data from survey and own computation

45
Table 4.13 shows that majority of the respondents said that they did not getting comparable
social services from the government for the tax they paid (90.5 percent). While remaining (9.5
percent) are yes. According to this, taxpayers need various social services from the
government in return of what they have paid as a tax.

Table 4.13 paying tax and getting social services

Reasons Frequency Percentage
Yes 19 9.5
No 181 90.5
Total 200 100
Sources: data from survey and own computation

Table 4.14 shows 54.5 percent of the respondents respond that the amount of tax liability they
have paid is overstated whereas 40.5 percent of the respondents respond normal and 5.0
percent of the respondents respond understated. As stated by Brooks (2001), fairness or equity
is one of the main variables that determine the compliance of taxpayers. If there is fairness or
equity in the tax system, voluntary compliance of taxpayers with tax law can be easily assured.
Furthermore, the response from table 4.14 indicates (54.5%) of respondents said that the tax
they had paid is beyond their ability to pay. Whereas, those respondents responded 40.5
percent and 5.0 percent are said the tax they had paid is based on their ability to pay.

Table 4.14 Ability to pay and tax liability

Ability to pay Frequency Percentage

Overstated 109 54.5
Understated 10 5.0
Normal 81 40.5
Total 200 100
Sources: data from survey and own computation

Motivational postures represent the ways in which individuals position themselves with regard
to a regulatory authority and are predispositions to compliant or noncompliant behavior
(Braithwaite, et al., 1994 and Braithwaite, 1995). The aim of the study was to measure the
beliefs of taxpayers toward meeting their tax obligations in tax fairness context. Scores ranged
from 1 (strongly disagree) to 5 (strongly agree). As can be seen from table 4.15, 45.0 percent

46
and 8.5 percent of the respondents agreed and strongly agreed that they believe the way their
income taxes was spent benefit other people, but not them, while 18.5 percent ,15.5 percent
and 12.5 percent of the respondents strongly disagreed ,disagreed and were neutral
respectively. This implies that taxpayers believe they didn’t get any benefit from the tax paid,
so they think unfair and individuals are likely to seek to restore equity, through non-
compliance. (See Appendix 4 for details).

Moreover, a relatively higher mean value of 3.09 for the six item indicate that taxpayers have
positive attitude towards the fact that educating the taxpayers and conducting tax counseling
has the power to motivate taxpayers to obey the tax lows. From this, we understood that
educating taxpayers and conducting tax counseling motivate them to pay their fair share of
taxes voluntarily or act fairly.

Table 4.15 Descriptive statistics on Beliefs of taxpayers towards meeting their tax obligation
and fairness of taxation

Statement
N Mean Std.
deviation
I believe the way my income taxes will be spent will 2.90 1.297
benefit other people, but not me 200
The tax laws are easy to understand to you. 200 2.86 1.106
Tax payers should evade tax if everyone is doing it 200 2.93 1.317
Failure to pay taxes leads to strict punishment 200 2.77 1.333
Paying tax ultimately advantages every one? 200 2.80 1.371
Educating the taxpayers and conducting tax counseling 200 3.09 1.422
motivate the taxpayers to obey the tax lows
The new tax reform should pay their fair share of tax. 200 2.88 1.005
It is acceptable to overstate tax deductions on your tax 200 2.57 1.015
return 200
Valid N (listwise)
Overall Average 200 2.85 1.23
1-Minimum for mean, 5- the maximum mean, Number of respondent-200
Source: SPSS output from survey result of 2017

47
Generally, from the results in table 4.15 most respondents disagreed (Mean<2.85, and the
standard deviation is insignificant) that they believes with the statements that state the way
their income taxes are spent benefits other people, but not them, the tax laws are easy to
understand, taxpayers should evade tax if everyone does to, and the new tax reform should pay
their fair share of tax. On the other hand, they disagree with the statement that failure to pay
taxes leads to strict punishment; paying tax ultimately advantages every one, and overstates
tax deductions on tax return. So those statements indicated that most of taxpayers in Dire
Dawa are believed that paying taxes is advantages for other people and the way their income
tax spent benefit others but not them, so they believe unfair and this change on fairness
decision. While reduce revenue collected by the administration that is reluctant to meet their
tax obligation impact on fairness and this behavior change on compliance decision (see
Appendix4 for details).

4.1.1.6 Educational Level of Taxpayers

As shown in table 4.16 with respect to educational levels of the taxpayers of sample
respondents in the administration, different questions were asked. One of the questions
inquired was the reason for paying tax, 42.5 percent of the respondents said that they pay taxes
because it is an obligation to the government or state and 39.0 percent of the respondents said
that in the anticipation of public services from the government. This indicates there is a
positive understanding as to why taxpayers paying taxes and if successive works are done
probably better results can be registered. On the other hand, 6.0 percent of the respondents
said that they have no opportunity to evade, 5.50 percent said that they don’t know and the
remaining 7.0 percent of the respondents said that they pay taxes to avoid disturbances.
Particularly with respect to those who said there is no opportunity to evade, it indicates that
they have the intention not to pay if they have the opportunity to do so or their compliance
behavior is questionable. The response of those who said they don’t know revenue collection
regime must create awareness.

48
Table 4.16 Reasons for paying taxes
Reasons Frequency Percentage

To avoid disturbances (penalties, sanctions) 14 7.0

In anticipation of public services 78 39.0
There is no opportunity to evade 12 6.0
It is an obligation towards the government 85 42.5
Don’t know 11 5.5
Total 200 100
Sources: data from survey and own computation

In order to know whether the tax authority delivered training or education to enhance the
knowledge of taxpayers, the survey result showed that 58.5 percent of respondents were not
taken any trainings that could developed there awareness. Whereas 3.0 percent, 6.0 percent
and 32.5 percent of the respondents replied that they had taken trainings twice, thrice and once
in a year respectively (table 4.17).

Table 4.17 Programs of education/ training sessions delivered in a year

Education Frequency Percentage

Once a year 65 32.5
Twice a year 6 3.0
Three times per year 12 6.0
Above three times per year 0 0
Note at all 117 58.5
Total 200 100
Sources: data from survey and own computation

In order to know whether the taxpayers had average level of tax knowledge, the survey result
showed that 61.0 percent of the respondents replied yes, while the remaining 39% replied no.
Table 4.18 At least average level of tax knowledge

Tax knowledge Frequency Percentage

Yes 122 61.0
No 78 39.0
Total 200 100
Sources: data from survey and own computation

49
Tax administrations consult with taxpayers about changes in taxation and provide beneficial
information to them. The success of these consultations positively affects taxpayers to submit
proper returns and pay taxes voluntarily. So to know whether the taxpayers belief that high-
income earners can easily evade tax with the help from tax consultants, the survey result
showed that 55.0 percent agree and the remaining are not (45.0 percent). This implies unjust in
tax system, so that taxpayers behavior changed toward evading tax (Table 4.19).

Table 4.19 Belief of taxpayer and tax evasion of high-income earners

Beliefs of taxpayers Frequency Percentage

Yes 110 55.0
No 90 45.0
Total 200 100
Sources: data from survey and own computation

Table 4.20 presents the descriptive statistics result on level of education and tax fairness. The
level of tax education received by taxpayers is an important factor that contributes to the
understanding of tax requirements. Therefore, respondents were asked different questions to
assess the level of their knowledge of tax rules and regulation related to income tax are clear
and understandable, knowledge to calculate income and tax liability timely and correctly and
use tax experts to compute income taxes. Therefore, respondents were asked to rate their tax
education level using the variables on a five point Likert scale, where strongly disagree = (1);
disagree = (2); neutral = (3); agree = (4); strongly agree = (5).

Most of the respondents ranked the variables with mean value approximately 3 (agree with the
respective variables). This shows that most of the taxpayers are familiar with tax rule and
regulation as indicated in Table 4.20 the table describes survey responses of category “B”
taxpayers they are certain about the period and where to pay my tax liability. Accordingly, the
majority of the respondents said that they try to read and understand the rule and regulation
related with tax law, knowing all what is required from them in respect of their income tax
obligations and know the income tax is not fair in general. Further, the survey indicates that
almost more than half of respondent have sufficient knowledge to compute income tax. From
this we understand that they understand tax rules and regulation of Ethiopia tax system.

50
Respondents were also asked to rate their income tax burden using the variables (see
Appendix 4). It is clearly shown that most of the respondent responses that they don’t believe
that income tax have the same burden is distributed across to taxpayers. This implies that,
majority tax payers perceive that the amount they pay as income tax to tax authority was not
justified with their income which is not in their ability to pay principle or it is perceived to be
unfair by taxpayers.

In this study, it was found that most of the taxpayers disagree on using tax experts to compute
their income taxes. From this it can be understood that when educational level of taxpayers
increases it enhance their knowledge how to compute income tax increases. There for
educational level of taxpayers affect tax fairness.

Table 4.20 Descriptive statistics of educational level of taxpayers toward fair tax system

Statement
Std.
N Mean deviation
I am certain about the period and where to pay my tax
liability. 200 3.98 1.098
As far as I know the income tax is not fair in general. 200 3.17 1.174
I tried to read and understand the rule and regulation 200 3.56 1.141
related with tax law
I believe that income tax have the same burden is 200 2.80 1.200
distributed across to taxpayers.
I don’t have sufficient knowledge to calculate income 200 2.83 1.212
tax.
I use tax experts to compute income taxes. 200 2.82 1.274
I know all what is required from me in respect of my 200 3.89 1.069
income tax obligations
The rules and regulation related to income tax are clear 200 2.79 1.254
and understandable.
All tax payers have knowledge to calculate income tax 200 2.20 1.220
liability.
Overall Average 200 3.12 1.18
1-Minimum for mean, 5- the maximum mean, Number of respondent-200
Source: SPSS output from survey result of 2017

51
 4.2 In-depth interview and Content Analysis of Open-ended Questions results
4.2.1 In-depth interview results

As stated in chapter 3, apart from the survey, this study employed in-depth interviews with
category “B” taxpayers. This aimed at obtaining fairness on the tax system and the effect of
attitude of taxpayers, beliefs of taxpayers and level of education on fairness of taxation
system. In the study, the category “B” taxpayers participated from the four urban Kebeles.
This in turn enables the study to assess divergent views and arguments from different angles.
In the context of the above data sources, the following section presents the results of in-depth
interviews with 20 category “B” taxpayers which are purposively selected. As far as this study
is focused on the issues of tax fairness, the participants had reflected mixed ideas.
Accordingly, from the different tax fairness factors, 35 percent of interviewees responded that
the current income tax system is fair whereas 65 percent of them however were unhappy with
the prevailing income tax system (table 4.21).

Table 4.21 Summary of responses on in-depth interview

Responses Frequency Percentage
Those individuals with similar amounts of income pay similar 1 5.0
amount of tax
Not all taxpayers paid their fair share of the tax burden 4 20.0
The middle-income earners treated fairly under the current tax 1 5.0
system
The administration of the income tax system is inconsistent 2 10.0
across years and taxpayers and lead to fairness tax
All taxpayers accept responsibility for paying their fair share 2 10.0
of the tax burden
Practically high-income earners are not taxed at progressive 3 15.0
tax rates than low-income earners.
The government are not effectively utilizes a reasonable 2 10.0
amount of tax revenue to achieve social goals, such as the
provision of benefits for low income families
The benefit receive from the government by high-income and 3 15.0
low-income earners are not equitable and ability to pay
principles
The government spends too much tax revenue on unnecessary 2 10.0
welfare assistance
Individuals who deliberately evade paying their taxes should 1 5.0
be penalized with the same amount of penalty regardless of the
amount of tax evaded is observable this is unfair

52
Total Tax Fairness response 20 100

The taxpayers intention to avoid tax, is unfair 5 25.0

Do you have trust in the employees of Tax Authority? 5 25.0
Taxpayers evade taxation if possible 10 50.0
Total Attitude of taxpayers response 20 100
Do you beliefs that taxpayer intention to avoid tax is unfair 6 30.0
The beliefs of taxpayer toward meeting their fair tax obligation 4 20.0
is fair
Educating the tax payers and conducting consultation sessions 10 50.0
Total Beliefs of taxpayers response 20 100
Tax payers have only know how with a general knowledge and 8 40.0
ideas of the tax system
Does Tax payers have at least average level of tax knowledge 6 30.0
if you have sufficient knowledge, your perception on fairness 3 15.0
would be different
Doesn’t have technical knowledge and legal knowledge 3 15.0
Total Education level response 20 100
Sources: Category”B” taxpayers in- depth interview outcomes and own computation.

With respect to level of tax knowledge issues the researcher has sought that 85 percent of the
participant had idea on the fairness of taxes whereas the remaining 15 percent replayed that
they don’t have detail technical and legal knowledge on tax fairness. Besides, this 25 percent
of participant of the interview reflected that the perception of taxpayers has unfair nature with
respect to taxpayer intention to avoid tax and 25 percent of the respondent perceived that they
trust the employees of tax Authority. Whereas 50 percent of the participant reflected,
taxpayers evade taxation if possible. Furthermore, 80 percent of the participant agreed that
educating the tax payers and conducting consultation sessions and taxpayer intention to avoid
tax is unfair had series effect on the tax fairness issues. As the same times 96 percent of the
respondent replayed that, the government particularly the tax authority should improve the
current tax system, through giving high emphasis on tax fairness dimension (table 4.21).

53
 4.2.2 Content Analysis of Open-ended Questions

On the other hand, the respondents were also given opportunities to indicate their comments
on some open ended questions and to give general comments on the overall fairness of tax
system. Accordingly they issued several comments and mainly regarding problems and
measures that have to be undertaken. These comments were categorized and listed as below:

o The tax system lacks fairness or equity.

o The tax system is traditional.
o Absence of transparency in the overall tax system.
o No adequate provision of social services.
o No sufficient tax education/ lack of awareness, and poor communication between the
tax authority and taxpayers.
o Weakness in tax collection and enforcement.
o So many taxpayers were not accommodated by the tax system and there is high
prevalence of illegal trade.

The additional comments forwarded by the taxpayers were generally summarized under the
above seven points. The respondents also stated the possible actions that have to be undertaken
in order to bring about improvement in the tax system and ultimately ensure voluntary tax
compliance. Based on the detail comments given by the respondents, the above points were
briefly explained below.

o Several respondents firmly commented that the tax system lacks fairness and equity.
They further elaborated their comment that individuals having equal income are not
paying equal tax amounts and this highly affects the taxpayers’ motivation to be
compliant. In other words, as long as the tax system lacks horizontal equity
(individuals with equal income pay equal tax) it is difficult to change taxpayers’
attitude in order to bring tax fairness.
.
o The other comment given by the respondents is that the tax authority does not provide
sufficient training to taxpayers to boost awareness. According to the respondents the

54
 root cause of all the problems in the overall tax system is lack of awareness which is
attributed to poor tax education practice and absence of consultation sessions between
taxpayers and the authority. That is, there is no culture of communication and
consultation between both parties and this is what resulted in the existence of a gap.

o On the other hand the respondents indicated that there is no sufficient provision of
social services by the government. According to their comment, the taxpayers need
various social services from the government in return of what they have paid as a tax.
If there is no provision of sufficient social services, the willingness and motivation of
the taxpayers to pay their tax obligation in full and on timely basis may be affected, i.e.
the taxpayers perceive that their money is being misappropriated or used for
meaningless purposes.

o The respondents also commented that the tax authority is not effective with respect to
tax collection and enforcement. They further explain that there are several taxpayers
who are not included in the tax bracket and large amount of uncollected tax exists as an
arrear. Unfairness of tax collection is mainly developed due to corruption (rent seeking)
by tax officers. Moreover, the tax authority exercises little effort in enforcing the tax
law.

o The other point the respondents indicated was that there is no transparency in the tax
system. That is, the taxpayers have no access to ad quit information and changes in
taxation. In other words, the procedures in tax assessment and computations are not
objectively understood by taxpayers or the tax authority is reluctant in making this
procedures objective, transparent, and understandable to taxpayers.

o Finally, the point strongly raised by the respondents is that there are several individuals
who are doing business but not paying tax or not known as taxpayers. Similarly there
are so many individuals who are engaged in illegal (contraband) trades and according
to the views of the respondents, all these abnormal acts are hampering their business
activities and as a result unfair competition has prevailed in the administration. The
respondents have said that the administration as well as the tax authority has done little
55
 to curb these acts so as to reduce the act of tax evasion. The respondents generally
commented that these problems have created distortion to fair taxation and affected
their attitude towards taxation negatively.

4.3. Analysis of Measures

4.3.1. Reliability Test

The Cronbach’s alpha coefficient was computed for both the tax fairness and determinant
factors. Table 4.22 reports the alpha scores for all the variables. As proposed by Nunnally
(1967 & 1978), The Cronbach’s alpha coefficient was within the acceptable level of reliability
of 0.70 for scale acceptability. Therefore, it indicates that the factors used are reliable.
The overall Cronbach’s alpha coefficient was 0.899 which indicate that 89.9% of the
variability in a composite score by combining those four items considered true
variance/reliable variance or internally consistent reliable variance is presented in appendix 6a.
.
Table 4.22: Cronbach’s Alpha for Determinant Factors and Tax fairness
Variables Cronbach’s Alpha No. of items
Attitude of taxpayers 0.722 7
Beliefs of taxpayers 0.789 8
Educational level of taxpayers 0.777 8
Tax Fairness 0.954 7

Source: Author, field survey, 2017

4.3.2 Correlation Analysis

4.3.2.1 Pearson correlation coefficient

A correlation test is conducted to determine the relationship between tax fairness to category
“B” taxpayers as the dependent variable and the independent variable in this study. Table 4.23
shows the correlations between fairness of tax and the three factors.

56
Table 4.23 shows the relationship between independent variables and tax fairness. The
correlation analysis has indicated that all variables were significant and positively correlated at
the p<0.01 with r = .770 for ATT, r = .772 for BLT and r = .683 for EDL, which are
statistically significant at 99% confidence level. This implies that at a 1% level of significance,
it was discovered that beliefs of taxpayers and attitude of taxpayers plays a significant role in
determining tax fairness to category “B” taxpayers in Dire Dawa Administration.

Moreover, the table presents the association between the selected variables and tax fairness of
category “B” taxpayers for a sample of 200 taxpayers in Dire Dawa Administration. The result
on table below further indicates that, there is a substantial positive correlation between
educational level of taxpayers and tax fairness (r = .683), which is statistically significant at
99% confidence level. Correlation matrix of all the variables is presented in appendix 5.

Table 4.23: The relationship between independent variables and tax fairness
Tax fairness
Attitude of taxpayers Pearson Correlation .770**
Sig. (2-tailed) .000
N 200
Beliefs of taxpayers Pearson Correlation .772**
Sig. (2-tailed) .000
N 200
Educational level of Pearson Correlation .683**
taxpayers Sig. (2-tailed) .000
N 200
**. Correlation is significant at the 0.01 level (2-tailed).
Source: Author, field survey, 2017

4.3.3 Multicollinearity Test

As we are producing multiple correlations and regression model we need to be aware of

certain features of the multicollinearity. That means, when two or more independent predictors
are highly correlated with each other this is known as multicollinearity. As a general rule of

57
thumb, predictor variables can be correlated with each other as much as 0.8 before there is
cause for concern about multicollinearity (Perry R. et al., 2004: 323). But, here a pair wise
correlation is below 80%, which indicates the absence of series problem of multicollinearity in
the regression equation as indicated in the correlation matrix (see appendix 5).

Similarly, the existence of strong multicollinearity among the explanatory variables was
checked using Variance Inflation Factor (VIF) technique. According to Gujarati (2004), if a
strong liner relationship exists among the explanatory variables then this would result in large
VIF value. A VIF value greater than 10 is used as a signal for the existence of a severe
multicollinearity among explanatory variables. As can be seen from table 4.24 (or appendix
6b), there was no explanatory variable dropped from the estimation models of tax fairness,
since no serious problem of multicollinearity was detected from the respective VIF result.

4.3.4. Multiple Regressions Analysis

According to Coakes and Steed (2007), multiple regressions are an extension of bivarite
correlation. They state that the result of regression is an equation that represents the best
prediction of a dependent variable from several independent variables. Regression analysis is
used when independent variables are correlated with one another and with the dependent
variable. Multiple regression analysis is conducted to identify the relationship between tax
fairness as dependent variable and the independent variables. A total of five explanatory
variables which are expected to influence the taxpayers’ fairness toward taxation were
included in the model. The outputs of multiple regressions are showed in table 4.24.

4.3.4.1 Results of multiple regression analysis

To test the hypothesized relationship, correlation and then a series of multiple regression
analysis were conducted. In doing so, a combination of demographic and tax fairness factors
were used. The output from this analysis, a beta coefficient, provides as fairness of the
significance and the impact of the five predicators (attitude of taxpayers, beliefs of taxpayers,
educational level of taxpayers, sex and age of taxpayers) individually in predicting the
dependent variable (tax fairness).
58
 Table 4.24, Results of multiple regression analysis

Unstandardized Standardized
Model Coefficients Coefficients
Std.
B Error Beta t Sig. P Value VIF
1 (Constant) -.005 .018 -.294 .769 - -
Attitude of taxpayers .508 .078 .351 6.522 .000 <1% 2.67
Beliefs of taxpayers .340 .065 .306 5.212 .000 <1% 2.09
Educational level of .246 .057 .220 4.324 .000 <1% 1.07
taxpayers
Sex of taxpayers .025 .009 .103 2.752 .006 <1% 1.14
Age of taxpayers .019 .005 .158 4.130 .000 <1% 2.38
R2 (R2 adjusted)0.752 (0.745)
F statistics/ANOVA/ F(5,194)=117.39,
p<1%
Source: SPSS Regression result, 2017

As shown in Table 4.24 all the three independent variables tested in this study, attitude of
taxpayers (B=0.508, p<0.01), beliefs of taxpayers (B=0.340, p< 0.01), educational levels of
taxpayers (B=0.246, p<0.01), are statistically significant and there is positive relationship
between each of the three independent variable and tax fairness. Whereas the variable, sex of
taxpayers (B=0.025, p <0.01) and age of taxpayers (B=0.019, p<0.01) are also statistically
significant and there is positive relationship with tax fairness.

To sum up, attitude of taxpayers, beliefs of taxpayers and educational level of taxpayers would
positively and significantly influence on fairness of tax system and the demographic variable
i.e., age and sex of taxpayers also significantly influence the fairness of tax system.

All the explanatory variables included in this study can significantly explain at 99%
confidence level to the variation on the dependent variable. The standardized beta coefficient
column shows the contribution that an individual variable makes to the model. The beta
weight is the average amount the dependent variable increases when the independent variable
increases by one standard deviation (all other independent variables are held constant).

59
The second research question (what are the variables that generally affect’ fairness of taxation
system). Among the five significant independent variables, attitude of taxpayers is the highest
effect on fairness of tax system (β = 0.351) and the next is beliefs of taxpayers (β = 0.306). It
follows by educational level of taxpayers (β = 0.220). It follows by age of taxpayers (β =
0.158) and the last is sex of taxpayers (β = 0.103).

The unstandardized coefficients B column, gives us the coefficients of the independent

variables in the regression equation including all the predictor variables as indicated below.

FairT= -0.005 + (0.508)(ATT) + (0.340)(BLT) + (0.246)(ELT) + (0.25)(ST) + (0.019) (AGT)+ ei

(0.018) (0.078) (0.065) (0.057) (0.009) (0.005)

Regression analysis showed that the models were fit and the results were fully supporting the
hypothesis.

60
 5. CONCLUSION AND RECOMMENDATION

5.1. Conclusions

According to the officials of Dire Dawa Administration tax Authority, there is a substantial tax
gap between the tax that is probably planned to be collectable from economically active
individuals in the Administration and the tax that is actually being collected. One of the main
reasons for the tax gap is fairness of taxpayers and potential taxpayers, with the tax legislation.
The causes of unfairness has been demonstrated to be the attitudes and perceptions of
taxpayer’s. Dire Dawa is an Administration that comprises a diverse collection of cultures,
languages, beliefs and backgrounds. It is obvious that these different population groups may
have differing perceptions of tax fairness resulting from their cultural backgrounds or social
histories. These perceptions may, in turn, influence their attitudes towards tax fairness. In
addition to that, the researcher has identified a research gap that needs to be investigated the
fairness of taxpayers, and the factors contributing to fairness of taxpayers.

Against this background, it is of utmost importance to determine taxpayers’ fairness towards

taxation in order not only to influence government policy regarding taxation and protecting the
Administration tax base but also to enable government to market itself and its services more
effectively to the general public. This study was aimed at assessing a sample of taxpayers’
fairness with the tax in Dire Dawa Administration.
Based on the presiding analysis the paper finally drawn the following conclusions/findings:

o The tax authority is a responsible organ to activate tax fairness in the administration
and collecting the administrations tax revenue. The amount of revenue collected is
directly dependent on the efficiency and effectiveness of the authority. In light of this
the survey result showed the tax authority of the administration is not efficient and
effective in some aspects such as including non-taxpayers in to the system and
collecting profit tax from all tax payers fairly. It can be concluded that, so long as this
is the fact it is not easy to bring taxpayers toward fairness of tax system and narrow the
tax gap.

61
o The survey results show the attitudes of taxpayers in relation to their perception on
everyone’s responsibility for paying the correct amount of tax; taxpayers’ perceive
positively. Contrarily, they believe that everyone’s is not paying his/her fair share of
income tax under the current income tax system.

o The tax authority gives equal consideration to all taxpayers on asked questions legal
aspect also taxpayers’ perceive negatively on income tax. A taxpayer perceives that
high income earner not pays high income tax i.e. income tax pays not on their ability to
pay leads taxpayers’ attitude toward pays unfair tax. This indicates that absences of
vertical fairness. Majority of the taxpayers believe that other taxpayer’s paying unfair
tax and the tax rate is unfair. In addition to that there is no administration consistency
in respect of the income tax system, the government does not effectively utilize a
reasonable amount of tax revenue to achieve social goals and not receive fair value
from the government in return for my income tax paid. From this, the study concludes
that as the taxpayers’ attitude is perceive negative which in turn affect fairness of
taxation. Taxpayers will therefore assess the fairness in relation to what they receive
from government compared to what they are charged as tax. This is supplemented by
the assessment of the income tax system as compared to other tax payers, as well as the
actual tax amount one pays and finally the tax rate structure i.e. preference for the flat
or progressive structures. From this, the study concludes that tax payers’ attitude affect
fairness of taxation.

o The study reveals that taxpayers beliefs toward meeting their tax obligation in relation
to the way their income taxes spent will benefit other people, but not them, taxpayer’s
perceive positively on fair, on the other hand they feel unfair and inequitable for them
which may reduce the motivation of taxpayer’s behavior toward fairness of taxation.

o The study also indicate that almost all of the respondent agree on tax laws are easy to
understand, failure to pay taxes leads to strict punishment, they believe educating the
taxpayers and conducting tax counseling motivate taxpayers to obey the tax and the
new tax reform pay their fair share of tax, while they disagree on paying tax ultimately
advantages every one, taxpayers should evade tax if everyone is doing it, overstate tax
62
 deductions on their tax return is acceptable. Most of the taxpayers believe the tax they
pay is over stated or above their ability to pay. From this, the study concludes that, tax
payers’ motivation to meeting their tax obligation reduced which affect fairness of
taxation.

o Awareness is a corner stone as far as fairness is concerned. The survey data has shown
that majority of the taxpayers know why they pay taxes. It can be concluded that there
is a positive understanding as to why people pay taxes and if successive works are
done probably better results can be registered.

o The third section describe about education level of taxpayers in relation to the tax
payers know-how about tax rules and regulation, certain about the period and where to
pay their tax liability, taxpayers had average level of tax knowledge, know-how about
what is required in respect of income tax obligations and the taxpayers ability to
clearly understand the tax rules and regulation. From this the studies conclude that as
education level of taxpayer’s increase the tendencies of the tax payers to avoid the
income tax increase. More specifically the education level shows that the tax payers’
knowledge to calculate their income tax and their ability to discover the gap on the tax
rules and regulation leads them to use these gaps in the negative ways to avoid their tax
liability by engaging in artificial transaction. From this the study concludes that,
educational level of taxpayer affect fairness of taxation.

Finally, based on the above finding, what the paper generally concludes that, factors that affect
taxpayers’ fairness behavior in the study area are attitude of taxpayers, beliefs of taxpayers and
educational level of taxpayers has found to have impact on taxpayers’ fairness towards
taxation and also demographic variable such as age and sex of taxpayers has found to have
effect in’ taxpayers perceptions towards fairness of taxation in the study area.

63
 5.2 Recommendations

Based on the study conducted using survey method and in depth interview taxpayers towards
the fairness of taxes were identified and possible recommendations were forwarded so that it
may help the tax authority and other policymakers to approach the issue accordingly:

First, the most obvious requirement for fairness or equity is to treat equal people in equal
circumstances in an equal way. If there is a reason for not discriminating between equals, then
this suggests that there should be discrimination between those who are not equal. Maintaining
tax equity and fairness is not achieved only through levying equal taxes on individuals who
have equal income but also each taxpayer should pay according to his ability- to pay. In
addition, bringing non taxpayers to tax system has to be considered as a measure of ensuring
tax equity. In other words, it is unfair to say that the tax system is equitable as long as several
capable traders are not paying tax. Taxpayers will be discouraged to the extent that the tax is
believed to be unfair and inequitable or so many others are not paying.

Second, hence, the question of fairness or equity is not only about dealing with current
taxpayers but also concerned with people outside the tax system. Ensuring equity means
encouraging and protecting honest and loyal taxpayers by adopting fair competition. This can
be achieved by incorporating in to the tax system all those who are eligible. The authority
must also involve the taxpayers or their representatives while estimating the daily sales or
revenue of taxpayers to address the question of fairness and equity. Generally, the authority
has to try its best in ensuring tax fairness and equity.

Third, awareness creation should go beyond simply giving tax education to taxpayers. It
should be extended to having consultative sessions with elderly, religious leaders, prominent
personalities in the society or other influential individuals. This can help to influence the
whole society through these influential persons who have acceptance in their respective
groups. There should be more preventative education for the public and increased awareness
of tax responsibilities in schools. Students should be educated early in their career about tax
responsibilities. Only through tax education concepts of taxation and tax knowledge can be

64
imparted. Furthermore, taxpayers’ need more information about their tax obligations and their
role in promoting the growth of the economy of the country and the well-being of its citizens.

Fourth, the tax education can be a tool to motivate taxpayers towards’ fairness. In the context
of reaching to the society at large, the tax authority can use the electronic media such as radio,
television, etc as a means to educate taxpayer and change their perceptions about taxation. All
of these promote a positive view to tax fairness. This is to inculcate in citizens a sense of
responsibility toward taxes. There is a need for citizens to understand and accept their
responsibilities of fairness.

Fifth, one of the areas to stress while dealing with the issue of fairness is the development of
persuasive communications between the tax authorities and taxpayers. The most effective tool
for making people more positive is to empower them with knowledge and changing taxpayer’s
attitude through sustainable awareness creation programs. There should be more preventative
education for the public and increased awareness of tax responsibilities in schools. Students
should be educated early in their career about tax responsibilities. All of these promote a view
for tax system fair at the same time to inculcate in citizens a sense of responsibility toward
taxes.

Sixth, there is no sufficient provision of social services by the government. According to the
result, the taxpayers need various social services from the government in return of what they
have paid as a tax. If there is no provision of sufficient services, the willingness and
motivation of the taxpayers to pay their tax obligation in full and on timely basis may be
affected, i.e. the taxpayers perceive that their money is being misappropriated or used for
meaningless purposes. Therefore the government should be transparent for the taxpayers‟
money and the service provided to the society.

Finally, to improve tax collection enforcement measures and requirements of submission

(regarding annual tax returns) and the income tax rates should be adjusted, with adjustments
made to both the income threshold and rates.

65
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69
 Appendix 1
Fairness of Taxpayers Survey Instrument (English Version)
Haramaya University
School of business and economics
Department of management
Dear Respondents,
This study is conducted in partial fulfillment of the requirements for the master’s degree in
business administration at Haramaya University. Its main objective is to investigate “factors
affecting fairness of taxation” on category “B” tax payers in Dire Dawa Administration with in
Sabean, Gendekore, Megala and Taiwan urban kebeles. The research is going to be carried out
on your responses and other relevant data that could support it.

This questionnaire contains five parts: Part I requires demographic information whereas from
part II to part V requires statement designed to measure factors affecting fairness of taxation
on category “B” taxpayers and also to understand the reason between unevenness revenue
generate capacity and actual collectable revenue within Dire Dawa administration .To support
the reliability of data obtained from in-depth interviews from selected category “B” taxpayers
and the investigator strive to gather relevant information from selected taxpayers and officers
by self-administered Questionnaire based on their willingness full responsibility because of to
give tangible answer for the Questionnaire.

Participant in this study is completely voluntary; the information provided is purely for
academic purpose and strict confidentiality will be maintained. Alem Kebede is doing the
research under the guidance of Mr. Workneh Kassa (Doctor) at Haramaya University college
of Business and Economics. In order to accomplish this study, you are kindly request to
complete this questionnaire; your kind cooperation is highly appreciated.
For further information please contact. Alem Kebede Tekle by the following address:

Phone number: 0915-73-55-90 or 0921695874

E-mail address: alexokebe@g-mail.com

70
Part I: Demographic Profile of the Respondents.
The following statement requires information about yourself and they will not be used to
identify any individual don’t write your name. Please fill in only one-person per question.
Questionnaire to be filled by Managers or owners of the business. Pleas tick (√) the letter that
appropriately represents your response in each of the following table questions.
Demographic variable Response
1. Gender
Male
Female
2. Age (in year)
< 30
30-39
40-49
50-59
60-69
> 70
3. What is your position in the sector
Owner
Manager
Accountant
Others
4.What is your education level
Below High school
High school
Certificate
Diploma
Degree
Master degree
Others
5. What is your main business sector
Manufacturing
General merchandising and Trade
Service (secretarial, maintenance, food & beverage, etc.)
Others
6. Are you registered with revenue authority
Yes
No
7. For how long has this business been in existences
< 4 years
5 - 7 years
8 - 10 years
11 years and above

71
Part II- Questions related to Attitudes of Taxpayers
Kindly respond to the following statements to indicate your opinion to each of the statement. There are
no right and wrong answers. (Please tick one box on a 5point scale for each statement.)

Ser Statements

Strongly disagree(1)
no

Strongly agree(5)
Disagree(2)
Neutral(3)
Agree(4)
The following statement related to Attitudes of taxpayers toward fairness of taxation
1 It is everyone’s responsibility to pay the correct amount of tax 1 2 3 4 5
2 It is fair that high income earners are subject to tax at progressively 1 2 3 4 5
higher tax rates than low- income earners. This also applied
practically.
3 I receive fair value from the government in return for my income tax 1 2 3 4 5
paid (e.g. benefits)
4 Tax authority gives equal consideration to all taxpayers. 1 2 3 4 5
5 I believe the government utilizes a reasonable amount of tax revenue 1 2 3 4 5
to achieve social goals, such as the provision of benefits for lower
income families.
6 The administration of income tax system by taxing Authority is 1 2 3 4 5
consistence across years and taxpayers
7 I believe everyone pays their fair share of income tax under the 1 2 3 4 5
current income tax system.
8 Compared to other taxpayers, I pay more than my fair share of 1 2 3 4 5
income taxes.
9 I believe that tax rates generally in Ethiopia are fair 1 2 3 4 5
10 I think other taxpayers pay fair tax. 1 2 3 4 5
11 Penalties are the most appropriate tool for improving tax fairness 1 2 3 4 5
Please circle the letter that appropriately represents your response from the given choices

12. Do you think that the tax you are paying is fair and based on your ability to pay?
1. Yes 2.No
If your answer to question number 12 above is No, why not?----------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
13. Do you know why you pay tax?
1. Yes 2.No
72
If your answer to question number 13 above is Yes, please specify the reason --------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
14. Do you believe every equal status taxpayers pays equal amount of tax?
1. Yes 2.No

Part III: Questions related to Beliefs of Taxpayers

Kindly respond to the following statements to indicate your opinion to each of the statement. There are
no right and wrong answers. (Please tick one box on a 5point scale for each statement.)

Ser Statements

Strongly disagree(1)
no

Strongly agree(5)
Disagree(2)
Neutral(3)
Agree(4)
The following statement related to Beliefs of taxpayers toward fairness of taxation
1 I believe the way my income taxes will be spent will benefit other 1 2 3 4 5
people, but not me
2 Personally, would you agree that the income tax burden imposed 1 2 3 4 5
upon you is fair?
3 The tax laws are easy to understand to you. 1 2 3 4 5
4 Tax payers should evade tax if everyone is doing it 1 2 3 4 5
5 Failure to pay taxes leads to strict punishment 1 2 3 4 5
6 Do you believe paying tax ultimately advantages every one? 1 2 3 4 5
7 Do you believe educating the taxpayers and conducting tax 1 2 3 4 5
counseling to motivate taxpayers to obey the tax
8 The new tax reform should pay their fair share of tax. 1 2 3 4 5
9 The ability to pay/time to pay tax is fair. 1 2 3 4 5
10 It is acceptable to overstate tax deductions on your tax return 1 2 3 4 5
Please circle the letter that appropriately represents your response from the given choices

11. What do you think about the public beliefs towards fair taxation, including you?
1. Excellent 3. Fair
2. Good 4. Poor
12. Do you think that you are getting comparable social services from the government for the
tax you have paid?

73
 1. Yes 2.No

13. Considering your ability to pay, how do you think the amount of tax liability you have
paid?

1. Overstated 2. Understated 3. Normal

Part IV-Questions related to awareness (education) level of Taxpayers about tax system

Kindly respond to the following statements to indicate your opinion to each of the statement. There are
no right and wrong answers. (Please tick one box on a 5point scale for each statement.)

Ser Statements

Strongly disagree(1)
no

Strongly agree(5)
Disagree(2)
Neutral(3)
Agree(4)
The following statement related to educational level of taxpayers toward fairness of taxation
1 I am certain about the period and where to pay my tax liability. 1 2 3 4 5
2 As far as I know the income tax is not fair in general. 1 2 3 4 5
3 I tried to read and understand the rule and regulation related with 1 2 3 4 5
tax law
4 I believe that income tax have the same burden is distributed across 1 2 3 4 5
to taxpayers.
5 I don’t have sufficient knowledge to calculate income tax. 1 2 3 4 5
6 I use tax experts to compute income taxes. 1 2 3 4 5
7 I know all what is required from me in respect of my income tax 1 2 3 4 5
obligations
8 The rules and regulation related to income tax are clear and 1 2 3 4 5
understandable.
9 All tax payers have knowledge to calculate income tax liability. 1 2 3 4 5
Please circle the letter that appropriately represents your response from the given choices

10. Why do you pay taxes (check all that apply)?

1. To avoid disturbances (penalties, sanctions,)
2. In the anticipation of public services
3. There is no opportunity to evade.
4. It is an obligation towards the government.
5. Don’t know.

74
State if any ---------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
11. How often you are attending education sessions about taxation?
1. Once a year
2. Twice a year
3. Three times per year
4. Above three times per year
5. Note at all
12. Do you think that taxpayers have at least average level of tax knowledge?
1. Yes 2.No
13. Do you agree with the belief that high-income earners can easily evade tax with the help
from tax consultants?
1. Yes 2.No

Part V: Questions related to Taxpayers Fairness of taxation (Dependent Variable)

Ser. Questions Strongly Disagree Neutral Agree Strongly

no. Disagree Agree
Tax payers should beliefs unfair if
1 people with the same income not pay
the same amount of taxes
Tax payers act unfairly if the tax
2 system and the income tax procedure
not helping for fair tax collection
3 Tax payers should see unfair if people
not pay based on their abilities to pay
4 Tax payers should act unfairly
if tax burden imposed is too high
5 Evading tax due to lack of ability to
pay /time to pay tax is unfair
6 Tax payers should evade tax if
everyone is doing it.
Taxpayers beliefs unfair if everyone are
7 not paying their fair share of income
tax
Tax payers should act unfair if
8 authority not treats all taxpayers fairly
and reasonably.
Taxpayers beliefs unfair if fair tax not
9 enable to welfare of society

75
Add if you have additional comment----------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------

14. Give your general comment on the overall fairness of taxation and how unfairness towards
taxation can be developed.
-------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------

Thank you very much for your cooperation!!!!

Confidentiality
The views expressed in the completed questionnaire will be treated in the strictest confidence.
Any information identifying the respondents will not be disclosed.

76
 Appendix 2
Haramaya University
School of Business and Economics
Department of Management
Appendix 2: In-Depth Interviews –To Dire Dawa Administration Category “B”
Taxpayers.
1. What is your understanding on fairness of taxation?
2. Is the current tax system fair/unfair? Could you please elaborate on the aspects
(dimension) that you think it is fair/unfair?

3. If you are given a chance to improve the fairness of tax system, which aspect would
you focus on?

4. Do you believe that the government spends too much tax revenue to achieve social
goals, (such as health and education) and especially to benefit lower income families?
5. Do you agree that high income earners are subject to tax at progressively higher tax
rates than low- income earners?
6. How do you perceive the level of tax administration? Does the level of tax
administration lead to fairness of taxation?

7. What is your opinion about taxpayer attitude towards fairness of taxation?

8. Do you think the middle-income earners treated fairly under the current tax system?

9. Do you think that taxpayers have at least average level of tax knowledge?
10. Do you think that if you have sufficient knowledge, your perception on fairness would
be different? In your opinion, how does knowledge of taxation affect one’s perception
on the fairness of taxation?
11. What is your opinion about the beliefs of taxpayer toward meeting their fair tax
obligation, including you?
12. Do you agree that the low-income earners receive many benefits despite of the low tax
paid?
13. Do you agree to accept responsibility for paying your fair share of tax?
14. What is your opinion, taxpayer intention to avoid tax? Including you?
15. Would you have any other comments and ideas?

Thank you for your cooperation!!

77
 Appendix 3: Organizational Structure of Tax Authority

General Director

Deputy General
Director

Prosecutor
Women’s and HIV/AIDS/

Internal Audit
Ethics officer

Development plan and Communication and Change

Budget preparation army supportive process

Procurement, Finance and

HRM and Development Property administration
supportive process supportive process

Revenue Tax information & Taxpayers training, Tax Audit and

Assessment, collection & Information technology education and Enforcement core
Account summary core administration core process
process
customerservices
process core process

Tax AuditTaxpayers training, education

Revenue Network Taxpayers Tax Audit case
Assessment and
information education and team
collection case team
management and training case
operation training team
case team
Tax intelligence
Revenue investigation Customer
Cash register and investigation
case team service case
machine case team
team
implementation
case team
Record and Cash register
Account summary Tax information Archive machine inspection
case team
administration case administration
case team
team service

Fig -2: Chart of organizational structure

Source: Dire Dawa Administration Tax Authority
78
 Appendix 4: Results of Descriptive Statistics

Frequency Table (Attitude of taxpayers)

It is everyone’s responsibility to pay the correct amount of tax

Frequency Percent Valid Percent Cumulative

Percent
Valid strongly disagree 4 2.0 2.0 2.0
disagree 3 1.5 1.5 3.5
agree 68 34.0 34.0 37.5
strongly agree 125 62.5 62.5 100.0
Total 200 100.0 100.0

I receive fair value from the government in return for my income tax paid
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 31 15.5 15.5 15.5
disagree 57 28.5 28.5 44.0
neutral 50 25.0 25.0 69.0
agree 50 25.0 25.0 94.0
strongly agree 12 6.0 6.0 100.0
Total 200 100.0 100.0

Tax authority gives equal consideration to all taxpayers.

Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 34 17.0 17.0 17.0
disagree 78 39.0 39.0 56.0
neutral 22 11.0 11.0 67.0
agree 41 20.5 20.5 87.5
strongly agree 25 12.5 12.5 100.0
Total 200 100.0 100.0

I believe the government utilizes a reasonable amount of tax revenue to achieve social
goals
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 38 19.0 19.0 19.0
disagree 61 30.5 30.5 49.5
neutral 40 20.0 20.0 69.5
agree 45 22.5 22.5 92.0
strongly agree 16 8.0 8.0 100.0
Total 200 100.0 100.0

79
The administration of income tax system by taxing authority is consistence across year
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 25 12.5 12.5 12.5
disagree 63 31.5 31.5 44.0
neutral 56 28.0 28.0 72.0
agree 50 25.0 25.0 97.0
strongly agree 6 3.0 3.0 100.0
Total 200 100.0 100.0

Compared to other taxpayers, I pay more than my fair share of income taxes.
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 13 6.5 6.5 6.5
disagree 67 33.5 33.5 40.0
neutral 43 21.5 21.5 61.5
agree 59 29.5 29.5 91.0
strongly agree 18 9.0 9.0 100.0
Total 200 100.0 100.0

I believe that tax rates generally in Ethiopia are fair

Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 44 22.0 22.0 22.0
disagree 66 33.0 33.0 55.0
neutral 28 14.0 14.0 69.0
agree 40 20.0 20.0 89.0
strongly agree 22 11.0 11.0 100.0
Total 200 100.0 100.0

I think other taxpayers pay fair tax.

Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 41 20.5 20.5 20.5
disagree 53 26.5 26.5 47.0
neutral 50 25.0 25.0 72.0
agree 44 22.0 22.0 94.0
strongly agree 12 6.0 6.0 100.0
Total 200 100.0 100.0

Penalties are the most appropriate tool for improving tax fairness

80
 Frequency Percent Valid Percent Cumulative
Percent
Vali disagree 9 4.5 4.5 4.5
d neutral 35 17.5 17.5 22.0
agree 9 4.5 4.5 26.5
strongly agree 72 36.0 36.0 62.5
Total 75 37.5 37.5 100.0
disagree 200 100.0 100.0

Frequency Table (Beliefs of taxpayers towards meeting their tax obligation and fairness of
taxation)

I believe the way my income taxes will be spent will benefit other people, but not me
Frequency Percent Valid Percent Cumulative
Percent

Valid strongly disagree 17 8.5 8.5 8.5

disagree 70 35.0 35.0 43.5
neutral 25 12.5 12.5 56.0
agree 51 25.5 25.5 81.5
strongly agree 37 18.5 18.5 100.0
Total 200 100.0 100.0

The tax laws are easy to understand to you.

Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 12 6.0 6.0 6.0
disagree 62 31.0 31.0 37.0
neutral 25 12.5 12.5 49.5
agree 89 44.5 44.5 94.0
strongly agree 12 6.0 6.0 100.0
Total 200 100.0 100.0

Tax payers should evade tax if everyone is doing it

Frequency Percent Valid Percent Cumulative
Percent
Vali strongly disagree 25 12.5 12.5 12.5
d disagree 67 33.5 33.5 46.0

81
 neutral 40 20.0 20.0 66.0
agree 53 26.5 26.5 92.5
strongly agree 15 7.5 7.5 100.0
Total 200 100.0 100.0

Failure to pay taxes leads to strict punishment

Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 34 17.0 17.0 17.0
disagree 78 39.0 39.0 56.0
neutral 13 6.5 6.5 62.5
agree 50 25.0 25.0 87.5
strongly agree 25 12.5 12.5 100.0
Total 200 100.0 100.0

Do you believe paying tax ultimately advantages every one?

Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 35 17.5 17.5 17.5
disagree 74 37.0 37.0 54.5
neutral 19 9.5 9.5 64.0
agree 40 20.0 20.0 84.0
strongly agree 32 16.0 16.0 100.0
Total 200 100.0 100.0

Do you believe educating the taxpayers and conducting tax counseling to motivate
taxpayers
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 35 17.5 17.5 17.5
disagree 50 25.0 25.0 42.5
neutral 15 7.5 7.5 50.0
agree 62 31.0 31.0 81.0
strongly agree 38 19.0 19.0 100.0
Total 200 100.0 100.0

The new tax reform should pay their fair share of tax.
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 10 5.0 5.0 5.0
disagree 72 36.0 36.0 41.0
neutral 62 31.0 31.0 72.0
agree 44 22.0 22.0 94.0

82
 strongly agree 12 6.0 6.0 100.0
Total 200 100.0 100.0

It is acceptable to overstate tax deductions on your tax return

Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 31 15.5 15.5 15.5
disagree 68 34.0 34.0 49.5
neutral 62 31.0 31.0 80.5
agree 35 17.5 17.5 98.0
strongly agree 4 2.0 2.0 100.0
Total 200 100.0 100.0

Frequency Table (awareness/ educational level of taxpayers toward fair tax

system)
As far as I know the income tax is not fair in general.
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 15 7.5 7.5 7.5
disagree 53 26.5 26.5 34.0
neutral 40 20.0 20.0 54.0
agree 67 33.5 33.5 87.5
strongly agree 25 12.5 12.5 100.0
Total 200 100.0 100.0

I believe that income tax have the same burden is distributed across to taxpayer
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 23 11.5 11.5 11.5
disagree 78 39.0 39.0 50.5
neutral 37 18.5 18.5 69.0
agree 41 20.5 20.5 89.5
strongly agree 21 10.5 10.5 100.0
Total 200 100.0 100.0

I don’t have sufficient knowledge to calculate income tax.

Frequency Percent Valid Percent Cumulative
Percent
Vali strongly disagree 20 10.0 10.0 10.0
d disagree 89 44.5 44.5 54.5
neutral 19 9.5 9.5 64.0

83
 agree 53 26.5 26.5 90.5
strongly agree 19 9.5 9.5 100.0
Total 200 100.0 100.0

I use tax experts to compute income taxes.

Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 21 10.5 10.5 10.5
disagree 91 45.5 45.5 56.0
neutral 18 9.0 9.0 65.0
agree 42 21.0 21.0 86.0
strongly agree 28 14.0 14.0 100.0
Total 200 100.0 100.0

I know all what is required from me in respect of my income tax obligations

Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 12 6.0 6.0 6.0
disagree 15 7.5 7.5 13.5
neutral 9 4.5 4.5 18.0
agree 111 55.5 55.5 73.5
strongly agree 53 26.5 26.5 100.0
Total 200 100.0 100.0

The rules and regulation related to income tax are clear and understandable.
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 20 10.0 10.0 10.0
disagree 50 25.0 25.0 35.0
neutral 28 14.0 14.0 49.0
agree 72 36.0 36.0 85.0
strongly agree 30 15.0 15.0 100.0
Total 200 100.0 100.0

All tax payers have knowledge to calculate income tax liability.

Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 68 34.0 34.0 34.0
disagree 75 37.5 37.5 71.5
neutral 19 9.5 9.5 81.0
agree 25 12.5 12.5 93.5
strongly agree 13 6.5 6.5 100.0
Total 200 100.0 100.0

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It is fair that high income earners are subject to tax at progressively high rate
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 59 29.5 29.5 29.5
disagree 97 48.5 48.5 78.0
neutral 15 7.5 7.5 85.5
agree 16 8.0 8.0 93.5
strongly agree 13 6.5 6.5 100.0
Total 200 100.0 100.0

I believe everyone pays their fair share of income tax under the current income
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 40 20.0 20.0 20.0
disagree 55 27.5 27.5 47.5
neutral 50 25.0 25.0 72.5
agree 43 21.5 21.5 94.0
strongly agree 12 6.0 6.0 100.0
Total 200 100.0 100.0

Personally, would you agree that the income tax burden imposed upon you is fair?
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 13 6.5 6.5 6.5
disagree 88 44.0 44.0 50.5
neutral 19 9.5 9.5 60.0
agree 68 34.0 34.0 94.0
strongly agree 12 6.0 6.0 100.0

Total 200 100.0 100.0

The ability to pay/time to pay tax is fair.

Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 25 12.5 12.5 12.5
disagree 71 35.5 35.5 48.0
neutral 25 12.5 12.5 60.5
agree 68 34.0 34.0 94.5
strongly agree 11 5.5 5.5 100.0
Total 200 100.0 100.0

I am certain about the period and where to pay my tax liability.

Frequency Percent Valid Percent Cumulative

85
 Percent
Valid strongly disagree 13 6.5 6.5 6.5
disagree 12 6.0 6.0 12.5
neutral 8 4.0 4.0 16.5
agree 100 50.0 50.0 66.5
strongly agree 67 33.5 33.5 100.0
Total 200 100.0 100.0

I tried to read and understand the rule and regulation related with tax law
Frequency Percent Valid Percent Cumulative
Percent
Valid strongly disagree 16 8.0 8.0 8.0
disagree 25 12.5 12.5 20.5
neutral 21 10.5 10.5 31.0
agree 106 53.0 53.0 84.0
strongly agree 32 16.0 16.0 100.0
Total 200 100.0 100.0

Appendix 5 Results of correlation matrix

Correlation Matrix
Tax fairness Attitude of Beliefs of Educational
taxpayers taxpayers level of
taxpayers
Tax fairness Pearson Correlation 1
Sig. (2-tailed)
N 200
Attitude of taxpayers Pearson Correlation .770** 1
Sig. (2-tailed) .000
N 200 200
**
Beliefs of taxpayers Pearson Correlation .772 .723** 1
Sig. (2-tailed) .000 .000
N 200 200 200
** **
Educational level of Pearson Correlation .683 .582 .681** 1
taxpayers Sig. (2-tailed) .000 .000 .000
N 200 200 200 200
**. Correlation is significant at the 0.01 level (2-tailed).

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 Appendix 6(a) Results of Reliability Test

Reliability Statistics
Cronbach's
Alpha Based on
Cronbach's Standardized
Alpha Items N of Items
.899 .904 4

Appendix 6(b) Multicollinearity test for explanatory variables included in

the multiple regression models

Variables VIF
Attitude of taxpayers 2.259
Beliefs of taxpayers 2.691
Educational level of taxpayers 2.025
Sex of taxpayers 1.102
Age of taxpayers 1.138

87