Tax Evasion Attitudes of Small Firms in Low- and Middle-income Countries: Evidence from Nigeria

Motivation The need to tax small firms for revenue generation alongside the aim of establishing a sustainable tax system for such firms that encourages economic growth has long been a challenge for lower-middle income countries, especially those with large informal economies, such as Nigeria. This article explores the drivers of tax morale of small firms in lower-middle income countries. Purpose This article investigates what determines the attitudes of small firms on their potential evasion of taxes on profits, defined here as tax morale. Our objective is to use a new, dedicated small firm survey in Nigeria with high power to construct regressions that can help explore, and contribute to, hypotheses about tax evasion attitudes of small firms. Methods and approach We use a new nationally representative dataset of 8000 small firms in Africa's largest economy, Nigeria, based on in-person interviews conducted in the summer of 2018. To investigate key factors shaping tax morale of small firms in Nigeria, we estimate an ordinary least squares (OLS) regression model using a comprehensive set of explanatory variables based on the large-N power of our survey. Findings We find that in Nigeria the normative dimension and business development dimension appear more important. Small firms that have a higher trust in the government seem to have better tax morale. But firms that believe corruption is relatively frequent have notably worse morale. Firms that are registered and have positive expectations of their own growth also appear to have better tax morale. Policy implications Small companies play an important role in Nigerian society as both employers and drivers of economic growth. Yet, tax compliance among small companies in Nigeria remains very low, as evidenced through our survey. Investigating tax morale and compliance of small firms is critical to design strategies to incorporate them in the tax base to the benefit of the entire country. In particular, the findings suggest that building trust in government and business development policies is important to improve tax morale.