Abstract:
The concept of tax compliance has attracted the attention of quite a number of
researchers in order to demystify the factors affecting it. Previous studies have linked
psychological factors and Tax knowledge to tax compliance or lack of it. This study
seeks to investigate the effect psychological factors and tax knowledge has on tax
compliance particularly among Micro and Small enterprise owners in Nairobi County,
Kenya. The small scale traders operating in the informal sector are characterized by low
tax compliance level. This could be attributed to Kenya Revenue Authority inability to
meet the revenue targets over the years. This study sought to investigate the effect of
psychological factors on tax compliance of micro and small enterprise owners in
Nairobi County, Kenya. The specific objectives were to determine the effect of taxpayer
attitude, tax knowledge, and social norms on tax compliance of micro and small
enterprise owners in Nairobi County, Kenya. The research was anchored on the theory
of planned behavior, tax morale theory, Allingham and Sandmo theory, and Expectancy
theory. The explanatory research design was utilized. The study target population was
21,100 licensed small-scale traders in Nairobi Central Business. A sample of 384 small
scale traders was selected using simple random sampling technique. Primary data was
collected using structured questionnaires. The collected data was analyzed
quantitatively using descriptive statistics such as percentages, means and standard
deviations to explain the characteristics of the study variables. Further, inferential
statistics such as Pearson correlation and regression analyses were used to test the
relationship between the study variables. A multiple regression model was estimated.
The regression findings indicated that tax payer attitude and tax compliance were
positively and significantly related (β=0.41, p=0.000). In addition, tax knowledge and
tax compliance were positively and significantly related (β=0.254, p=0.000). Results
further showed that social norms and tax compliance were positively and significantly
related (β=0.464, p=0.000). The study concluded that psychological factors including
tax payer attitude, tax knowledge and social norms had a positive and significant effect
on tax compliance of micro and small enterprise owners in Nairobi County, Kenya. The
study recommended that Kenyan government needs to ensure that the tax burden to the
small scale business is not much and instead make it affordable to them. The
government should ensure they train the business owners on the tax system so as they
have adequate knowledge on technical matters and legal matters relating to tax
administration. Business owners should mind whom they interact with since they are
likely to influence them on tax compliance matters. The study makes significant
contribution to field of tax administration in terms of policy, research and practice.