Market competition, fairness and tax compliance: the formal sector perspective

Abstract

This study aims to investigate the effects of the formal sector’s perception of market competition and tax fairness on tax compliance. The data has been borrowed from the World Bank’s Survey for the years of 2006-2018 on 49,788 managers of the formal private firms in 140 countries and is analyzed by using the ordered logistic regression. Our results show that the formal sector’s perception of market competition and tax fairness affect tax compliance. This study also finds that the interaction between the formal sector’s perception of market competition and tax fairness significantly affects compliance. Firms will exhibit greater tax compliance if they consider the competition with the informal sector less intense and tax systems fair. Overall, the results imply that governments need to create conducive market competition and to create and implement fair tax systems.