Effect of psychological factors and knowledge on Tax compliance of Micro and Small Enterprise Owners in Nairobi County, Kenya

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.