Research On Individual Income Tax Compliance Based On Behavioral Economics

Individual income tax has always been denounced as "the most difficult tax in the world" because it is a tax not only difficult to collect and manage but also with low tax compliance.The problem of tax compliance of individual income tax perplexes the tax authorities,and meanwhile constitutes a research field that has been attracting the attention of the theoretical circle for a long time.The income scale of individual income tax in China,in terms of its percentage in national revenue,showed an annual increase from 2000 to 2017,playing a tremendous role in raising financial funds for the state and regulating income distribution to promote social fairness.Nevertheless,what is not to be overlooked is the loss of individual income tax along with the scale of its collection.In June 2018,China carried out the seventh amendment to individual income tax law since its establishment,transforming the system of classified expropriation into the system of combining classified expropriation with comprehensive expropriation.One problem arising from the process of this revolutionary reform is the problem of tax compliance,and it has been arousing heated discussions in the society.The scale on which individual income tax losses can reflect,to a certain extent,the tax compliance of taxpayers.Then,what is the scale of the loss of individual income tax in China,and how has this scale been changing over the years? What factors have been making impact on individual income tax compliance,and whether positive or negative impacts have these factors been exerting on tax compliance? How is the tax compliance of individual income tax to be improved ? This study takes the following technical route to explore these issues: starting with theoretical research,the study examines the status quo,then moves on to an empirical research and a comparative research,and ends up with countermeasure research".Wholly problem-oriented,this paper traces the causes of the problem in accordance with its consequences.With literature research method,it reviews the relevant achievements made and reveals the shortcomings existing in the previous study about individual income tax;Using the investigation and analysis method,it analyzes the factors that affect the tax compliance of the individual income tax from the perspective of behavioral economics;Using empirical research methods,it further explores various factors that exert positive or negative impact on tax compliance,and finally,on the basis of the results of empirical analysis,the paper puts forward some suggestions to promote the improvement of individual income tax compliance.In specific,the study is mainlycomposed of the following seven aspects.First,Defining the theoretical analysis framework of individual income tax compliance based on behavioral economics.With limited rationality as the premise for hypothesis,behavioral economics integrates psychology into economics,and restores the completely rational economic man into an irrational and emotional person,who can understand human behavior more accurately and explain the motivation of behavior,so as to "prescribe the right medicine".On the basis of expounding the connotation and classification of tax compliance,this paper discusses the influence of expected utility theory,prospect theory and new public management on the development of tax compliance theory,analyzes both the economic and psychological factors that affect individual income tax compliance according to the essence of behavioral economics,and finds that the formation of taxpayers' tax behavior,be it compliance or non-compliance,results from the joint action of different influencing factors.Combining the results of the above theoretical analysis,this paper further discusses how various factors such as the tax model,the perception of tax fairness,tax service,tax collection and management,the protection of taxpayers' rights and the social tax environment affect the tax compliance of individual income tax.Second,Analyzing the theoretical model of individual income tax compliance.On the premise that people are completely rational,the expected utility theory discusses the choices made by the behavior subjects who take utility maximization as the behavior decision-making standard under the condition of uncertainty.The A-S model is the most classical individual income tax decision-making model based on the expected utility theory.The model is built on the assumption of rational people that behavior subjects weigh the opportunities they face against the expected utility,stay immune to the influence of non-economic factors when making decisions to seek benefits and avoid disadvantages,and pursue the maximization of their own utility.The conclusion shows that increasing the audit rate and penalty rate is conducive to increasing the tax return of individual income tax.Although A-S model is acknowledged as a classical theoretical analysis model for individual income tax decision-making,it is now questioned more and more because its hypothesis is based on the assumption of rational people without taking into account the psychological characteristics of taxpayers.Therefore,It is quite necessary to introduce behavioral economics into the tax decision of individual income tax.Based on the hypothesis of limited rational people and reducing behavior subjects to “real” persons,the theory can better explain the behavior decision of taxpayers in tax practice.On the basis of reference dependence,behavioral economics combines value function and weight functionto construct the tax decision model of individual income tax.Analysis of the model shows that tax rate,penalty rate,psychological cost,loss aversion degree and subjective inspection rate are all the factors that affect the tax decision of individual income tax by leading taxpayers to adjust their own tax decisions to the changes of these factors.Third,Overall investigation of tax compliance through the scale of individual income tax loss.Since the reform of tax distribution system China carried out in 1994,the situation of "three taxes combined" concerning individual income tax has been brought to an end.The revenue generated from individual income tax in 1994 was 83.10 billion yuan,occupying 1.62% of the total tax revenue which amounted to 5126.88 billion yuan.Obviously,this low proportion shows that the ability to raise financial income is limited and that the number of tax related personnel is small to whom due attention was not given during the process of tax collection and management.However,with the rapid development of economy and the improvement of residents' income level,the position of individual income tax is becoming more and more important.On the basis of defining the income ability of individual income tax,this paper estimates the loss scale of individual income tax in open economy and underground economy from 2007 to 2017 by using the method of measuring tax income capacity and the method of cash ratio.The results show that the tax loss of individual income tax is substantial,and the tax wastage rate is about50%.It is further shown that the growth rate of tax revenue lags behind the growth of income capacity,the scale and the rate of loss does not allow us to be optimistic,and the situation of tax compliance is quite upsetting.Fourth,Analyzing the reasons for the low compliance of individual income tax in China from the perspectives of system,tax collection and management and tax service,Tax collection and management is a very important factor affecting tax compliance which in turn is the goal and focus of tax collection and management.Tax collection and management mode and means,inspection and punishment,and tax service,all play important roles in promoting tax compliance.However,the efficiency of individual income tax collection and management is also affected by the characteristics of tax itself.Viewed whether from its tax scope,cost deduction,tax rate design,or from the tax personnel involved,personal income tax is more complex and consequently more difficult to collect and manage than other kinds of taxes.At the same time,the current personal income tax collection and management is formed on the basis of classified collection mode,and its drawbacks become more distinct when a comprehensive and classified collection model is adopted.In addition,individual taxpayers need tax authorities to provide accurate tax services,and the lack of tax services will inevitably affect the outcome of tax collectionand management,and ultimately affect the tax compliance of individual income tax.Fifth,Empirical analysis of the factors which influence individual income tax.A pre-survey questionnaire,in relation to the analysis of the factors influencing individual income,economic and psychological factors and interviews of experts,was designed according to Likert scale method.139 valid copies of the questionnaire were recovered,and after the elimination of some items according to reliability analysis,the questionnaire was modified to form the final questionnaire.The final version was sent out through the questionnaire network,838 copies were collected,of which 98 copies were invalid and got excluded,and 740 were considered as valid.The sample was randomly divided into two sub-samples.One of the two sub-samples was applied to exploratory factor analysis through statistical analysis software SPSS and the other sample was used to conduct confirmatory factor analysis and make significance evaluation through software AMOS.The results show that the perception of tax fairness,tax collection and management system,tax service,psychological cost of tax evasion and tax incentive are the main factors that affect the compliance of individual income tax.The multiple linear regression equation is established to analyze the influence of each factor on the tax compliance of individual income tax.The results show that the influence of each factor on tax compliance is significant,and the perception of tax fairness,tax service,tax collection and management,psychological cost and tax incentive all have a positive impact on individual income tax compliance.The implication is that promoting the perception of individual tax fairness,perfecting tax service and strengthening tax collection and management,increasing psychological cost and tax incentive are all likely to enhance the improvement of individual income tax compliance.Sixth,Making recommendations about establishing policies to promote individual income tax compliance.The tax loss of individual income tax is huge,the degree of tax compliance is not high,and the efficiency of tax collection and management is low.These problems result from the interaction between tax authorities,taxpayers and tax environment.According to behavioral economics,it is more crucial to influence taxpayers' tax behavior by influencing their psychology.The first strategy is to improve the individual income tax system from the aspects of tax subject,tax scope,expense deduction system and tax rate.This strategy is supposed to put individual income tax on the trend towards social fairness and improve taxpayers' perception of tax fairness.The second is to strengthen the actual strength of inspection and punishment,strengthen information management,realize tax source control,and effect strict control over the collection and management links.Thirdly,the tax authorities should cultivate the awareness of tax service,simplify the tax process,and innovate the service mode for the purpose of providing convenience for taxpayers,reducing the cost of tax compliance,and improving the quality of tax service.Fourthly,an incentive and restraint mechanism of tax compliance should be established."carrot plus stick" strategy should not just aim at increasing the psychological cost of evading tax,but also be employed to establish an honest tax reward mechanism.When both measures are properly implemented simultaneously,the tax compliance of individual income tax will be improved.Finally,the construction of supporting measures to improve personal income tax compliance.Promoting the improvement of individual income tax compliance is a systematic project,which requires not only the improvement of its system and collection and management,but also the complement of corresponding supporting measures as follows: Firstly,natural person property registration system rather than cash transaction system should be established to obtain information about the property status of natural persons so as to ensure that a detailed record of all their transactions and consumption is always available for inspection.Secondly,the inter-departmental networking coordination system should be improved so that taxpayers' property,income and expenditure and other information can be compared,thus achieving the information management of tax,Finally,the personal tax information should be brought into the personal credit database,and personal credit database should be constantly improved and perfected to guarantee that due attention is paid to the personal tax credit.During the individual income tax system reform wherein comprehensive expropriation is combined with classified expropriation,endeavors should be made to strengthen the tax collection and management,improve the tax service and perfect the supporting system.In this way,the goal of improving the tax compliance of individual income tax will be reached.