Tax Compliance Dynamics: Evaluating Behavioural Responses of Small Business to Tax Administration Interventions

Abstract

Small businesses play a pivotal role in economic growth by driving innovation and making substantial contributions to gross domestic product, especially in developing economies such as Indonesia. However, their potential as a reliable source of tax revenue remains constrained by persistently low tax compliance rates. This thesis examines how small businesses in Indonesia respond to administrative reforms and targeted policy interventions. Through an analysis of tax structural reforms and the design of experimental interventions, this research assesses the effectiveness of different strategies in enhancing compliance and examines the long-term sustainability of tax compliance.

Chapter 1 introduces the study's focus on small business taxation in Indonesia, examining its development, tax structure, and administration. This study also explores taxation from the perspectives of policymakers and entrepreneurs, shedding light on practical challenges. The chapter concludes by presenting the thesis's main research questions, objectives, and an overview of the next chapter.

Chapter 2 evaluates the tax simplification programme for small businesses employing a regression discontinuity design (RDD). The analysis reveals that, while the programme did not result in a significant increase in tax payments, it led to improvements in overall compliance, particularly in tax reporting. The findings further indicate a higher frequency of filings and a reduction in penalties for late submissions, with more pronounced effects observed in regions with better internet access and proximity to tax offices.

Chapter 3 investigates taxpayers' behavioural responses through a randomised controlled trial (RCT) embedded in a large-scale natural field experiment. This study evaluates the effectiveness of three treatment letters -- enforcement, information, and public goods provision letter -- in enhancing tax compliance. Additionally, the chapter explores the link between business tax compliance, geographic location, and distance, providing empirical insights from the field. Findings indicate that all letters significantly improve tax filing and payment, with deterrence letters having the strongest effect on payments and filing accuracy. The extent of responsiveness varies based on taxpayer characteristics, such as proximity to tax offices and compliance history. Targeting already compliant businesses near metropolitan area backfires, underscoring the need for geographically tailored tax administration strategies.

Chapter 4 examines the long-term effects of these interventions by assessing treatment effects over 12 periods and re-administering the initial interventions as outlined in Chapter 3 one year after the original trials. The analysis demonstrates that while the effectiveness of all letters declines over time, deterrence letters show the most sustained impact, continuing to significantly influence tax payments. These findings highlight the enduring effectiveness of deterrence strategies as a tool for fostering long-term compliance, even when interventions are repeated.

This thesis makes a significant contribution to the literature by offering robust empirical evidence on the behavioural responses of taxpayers to tax simplification policies and experimental interventions, with a specific focus on small businesses in Indonesia. By examining these responses, the research provides valuable insights into the complexities of tax compliance within a developing economy, where diverse socio-economic conditions and uneven enforcement capacities present unique challenges. Show more