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A new decade

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ISSN 2668-7798

Vol. 34, 2022

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The Effect of Tax Literacy on Tax Compliance: The Moderating Role of Patriotism

Maria Rosa Intansari¹, Supramono²

1 Department of Accounting, Faculty of Economics and Business, Universitas Kristen Satya Wacana, Salatiga, Indonesia, ²Department of Management, Faculty of

Economics and Business, Universitas Kristen Satya Wacana, Salatiga, Indonesia [email protected], [email protected]

Abstract. This study aims to examine the effect of tax literacy on tax compliance of individual taxpayers who have MSME businesses and examine the moderating role of patriotism on the effect of tax literacy on tax compliance. Collecting data using a survey through online questionnaires to individual taxpayers who have Micro, Small, and Medium Enterprises in the field of fashion, furniture, handicrafts, and other businesses besides the culinary field in Central Java. Based on the result of data collection obtained, 102 respondents and the data were analyzed using moderation Regression Anlysis. The results showed that tax literacy significantly affected MSME taxpayer compliance. Then patriotism is proven to moderate and has a significant relationship with tax litercay on tax compliance.

Keywords. Tax literacy, patriotism, tax compliance

1. Introduction

Taxes play an essential role in the economic sustainability of a country, therefore it is considered one of the sources of state revenue. In the Indonesian State Budget 2020 posture, tax revenue contributes 89% of total state revenue or IDR 1.070 trillion [1]. The taxes paid encouraged development in Indonesia, including infrastructure, education, health, and other sectors. Although taxes have an essential role as a source of development financing in various sectors, not all taxpayers have fulfilled their tax obligation. The Organization for Economic Co- Operation and Development (OECD) [2] explained that Indonesia’s tax ratio is at a very low level (11.9%) in Southeast Asia. The Directorate General of Taxes (DGT) continually strives to maximize tax revenue. In reality, efforts to increase contributions in tax payments have not achieved the desired result [3].

Many Factors influence taxpayers not to fulfill their tax obligations. Internal factors and external factors of taxpayers can affect taxpayer compliance [4]. Many factors cause a low level of individual taxpayer compliance in a country, one of which is the tax literacy factor among its people [5].

Literacy is defined as the ability to understand, evaluate, use and engage with written text to participate in society, to achive a goal to develop one’s knowledge and potential [6]. The scope of literacy is not only limited to scientific literacy but also one of the fields of literacy is Technium Social Sciences Journal

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financial literacy. Financial literacy presents a comprehensive concept, usually defined as the primary financial knowledge and financial skills needed to make the right financial choices [7].

Financial literacy is a critical component in making good financial decisions, and many individuals expect to have a lot of financial knowledge [8]. One of the concepts related to financial literacy is tax literacy.

Financial literacy is related to all knowledge and understanding of taxation owned by taxpayers and how the taxpayers act on their knowledge, so literacy is one alternative to creating a tax-aware society [3]. Taxpayers need knowledge and understanding of taxation to identify where and when tax consequences will be triggered [9]. Previous studies that have been done by examining the variabels between tax literacy and tax compliance obtained inconsistent result.

Inconsistencies that occur from previous studies, it is suspected that other factors play a role in the link between tax literacy and tax compliance.

One of the factors that allegedly played a role in the relationship between tax literacy and tax compliance was a sense of patriotism towards the state. Every taxpayer who obediently pays taxes is a patriot of the nation who is very instrumental in fighting for prosperity, security, welfare, progress, integrity and sustainability of the existence of the homeland, nation, and state through taxes [10]. The payment of taxes prduces a patriotic “warm radiance” The warm radiance in question is a voluntary contribution to the public interest [11]. [11] found a positive correlation between patriotism and taxpayer compliance therefore, if someone has a good tax literacy and is supported by patriotism, the greater the lebel of compliance in fulfilling their tax obligations.

Thus, this study will place patriotism as a moderating variable. This study aims to (a) examine the effect of tax literacy on tax compliance of individual taxpayers who own businesses; (b) examine the moderating role of patriotism over the effect of tax literacy on tax compliance. The study is expected to have at least two contribution; first, it can expand the knowledge of the determinants of tax compliance from a behavioral point of view, given that this study not only investigates aspects of literacy but also includes patriotism that has not receive attention in previous studies. Second, provide input to policymakers regarding efforts to increase taxpayer enthusiasm to fulfill tax obligation.

2. Literature Review and Hypotheses 2.1 Social Identity Theory

Henri Tajfel pioneered social identity theory in 1957 to explain prejudice, discrimination, social change, and conflict between groups. Social identity is formed in a grous, which is expected to create emotional and behavioral connections benefical to individuals and organizations. Social identity relates to involvement, care, and pride in one’s membership in the group [10].

The relatioship between patriotism and tax compliance aligns with social identity theory [12]. Patriotism as a national identity can influence the behavior or citizens, in this case, the taxpayer, for his/her compliance in fulfilling tax obligations [13]. Regarding tax compliance, patriotism as part of social identity is expected to increase taxpayer loyalty [18]. When taxpayer as a member of a cpuntry has an emotional bond with his/her country, it will affect the taxpayers behavior.

2.2 Tax Compliance

Tax compliance is defined as the actual behavior of fulfilling tax obligations [14].

Voluntary tax compliance underlies taxpayers’ intention and behavior to pay taxes [15]. Tax compliance is a form of taxpayer discipline in fulfilling tax obligations and reporting tax Technium Social Sciences Journal

Vol. 34, 455-464, August, 2022 ISSN: 2668-7798 www.techniumscience.com

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payables following existing rules and regulations. Tax compliance is a must for taxpayers based on understanding fairness and satisfaction with government services.

2.3 Tax Literacy

Literacy is a person’s ability to process and understand information [7]. Financial literacy is a lifelong skill that everyone needs to be able to live and operate in today’s complex economic environment [16]. One branch of financial literacy is tax literacy [17]. Research [18], more specifically, revealed that tax literacy is the ability to understand the rights and obligations of taxpayers and use tax knowledge and skilss to fill out tax returns correctly and comply with tax regulations and applicable laws.

Tax literacy is a dynamic process of developing skills and gaining confidence to recognize and understand the factors that inflluence tax decisions and the consequences of related decisions [9]. Tax literacy can be measured by three elements: tax awareness, contextual knowledge skills & resources, and meaning-making [9]. A person can be said to have good tax literacy if she/he can understand his/her rights and obligations as a taxpayer [18].

Tax literacy is important for improving tax compliance [14]. By having tax literacy, it is hoped that taxpayers will not only understand their tax rights and obligations but will also grow awareness to comply with their tax obligations.

The tax literacy campaign was introduced in Rwanda from 1998 to 2011 with result that initially, Rwandans had low levels of financial literacy and low tax literacy levels, but after the tax literacy campaign, the results increased significantly [19]. [9] in their research, showed that the results of tax literacy were positively correlated with tax compliance. The same results were also shown by [18] tax literacy level influences tax compliance. If a taxpayer has good tax literacy, they will tend to comply with taxes, and this is because the taxpayer will find out the tax information imposed on the taxpayer.

2.4 Patriotism

Patriotism is a form of love and devotion to the country itself, in other words, it is state of mind from within the individual that brings them to a state in which they experience non- monetary benefits [20]. The attitude of patriotism teaches everyone to always love the motherland as a place to stand, live, and seek a livehood [10]. Patritoism, when viewed in the context of behavior-based finance, can be a bias called affinity bias. Affinity bias is one type of behavioral bias that may occur in an individual and is included in emotional bias[21].

Patriotism is an attitude possessed by a persin who is willing to sacrifice something for the prosperity of his country, including the obligation to pay taxes as a form of sacrifice on the income received to help prosper his country. Patriotism in the context of taxation influences that high patriotism attitudes are assumed to have a strong desire to comply with current social norms [22]. Concerning tax compliance, a sense of patriotism as part of social identity and expected to increase taxpayer loyalty, this can happen when the taxpayer as a member of a country has an emotional bond with his countru so that it affexts the behavior of the taxpayer [21]. In line with this view [23] stated that it is essential for taxpayers to have patriotic values in terms of paying taxes. Patriotism is expected to strengthen the positiv influence of tax literacy on tax compliance. This is because taxpayers who have good tax literacy and understand their rights and obligations and how to carry out tax obligations if balanced with the spirit of patriotism, will tend to have higher tax compliance.

Based on the arguments and support of the result of previous studies, two hypotheses can be formulated in this study as follow :

H1: Tax literacy has a positive effect on taxpayer compliance.

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H2: Patriotism strengthens the infulence of tax literacy on taxpayer compliance 3. Research Methods

The population in this study is the individual Taxpayers (WPOP). The data collectipn technique was carried out through a survey using purposive sampling. Sampling has specific criteria, namely, the taxpayer who is used as a respondent is an individual taxpayer who has a Taxpayer Identification Number (NPWP), and the source of incomes comes from business activities. The type of business activities carried out by the taxpayer is a type of trading business in the fields of fashion, furniture, crafts, and other businesses other than in the culinary field.

Data collection using surveys through the distribution used google form will be sent online by whatsapp, e-mail, and instagram to taxpayer. Based on the result of the survey, 102 respondent were obtained.

The variabel used in this study are independent variable, dependent variable, and moderating variable. Dependent variable in this study is tax compliance, consisting of five indicators adopted from the study of [14]. Tax literacy as an independent variable consist of eight indicator and patriotism as a moderating variable consist of five indicators. Each indicator is measured using a likert scale with a score of 1 to 5. Data analysis using Moderated Regression Analysis based on output SPPS Statistic version 22. To test the hypothesis using the following estimation models as follows;

Y = α + β1LP + β2PT + β3LP.PT + e Keterangan:

Y : MSME taxpayer compliance α : Constant

β : Regression coefficient LP : Tax Literacy

PT : Patriotism

LP.PT : Tax literacy and Patriotism e : Error rate

4. Research Result 4.1 Analysis

In this study, the respondents used were individual taxpayer with NPWP whose income comes from MSMEs in the fields of furniture, fashion, crafts and other business besides the culinary field, as many as 102 respondent. The questionnaire was distributed online.

Table 1. Characteristic of Respondent (N=102)

Variable Category Tot

al Percentage

Gender Male 65 63.7%

Female 37 36.3%

Level of Education

High

School/Equivalent 40 39.2%

Diploma 20 19.6%

Bachelor 42 41.2%

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Sumber: Primary data processing (2022)

Table 1 shows that respondents are more male than female the percentage is 63.7%, for the age of respondents, the most between the ages of 31-40 years old by 43.1%, the highest level of education of respondent in this study is bachelor with percentage 41.2% .The category of the most types of business is the other category as much as 35.3%.

The validity test in this study used the Bivariate Pearson correlation. Each questionnaire item can be said to be valid if the value of the correlation coefficient r coun > r table with a significance level of 0.05. In this study, the value of the r table used was 0,193 (N=102 and α=5%). The data in Table 3 shows that the value pf the calculated r correlation coefficient for each variable is in the range 0.478-0.849 or > 0.193, so each questionnaire item used in each variable is declared valid. Meanwhile, the reliability test using Cronbach alpha obtained results ranging from 0,722-0,837, above the minimum standard of >0.6, so all of the research instrument are valid and reliable .

Furthermore, descriptive statistics are presented, which aim to provide an overview of respondents’ responses to the variables studied, such as tax compliance, tax literacy, and patriotism. Descriptive statistics are viewed from the minimum, maximum, average, and standard deviatiom values for each variable, as presented in Table 2. The tax compliance variable consisting of 5 statement items obtained an average value of 4.60 which means that most respondents agree with the statements submitted relating to individual taxpayers’ tax compliance. Thus, the respondents, in this case, MSMEs owners in this study, tend to comply with taxes. The tax literacy variable consisting of 8 statement items obtained an average value of 4.51, indicating that most respondent have good knowledge and understanding of taxation.

The patriotism variable, which has 5 statement items, has an average value of 4.66. It can be interpreted that, basically, respondents/MSMEs have a high patriotism attitude

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Table 2. Descriptive Statistics

No Questionnaire Indicator Min Max Mean Std.dev 1 I pay taxes according to tax

regulations

2 5 4,49 0,714

Respondent Age

18-30 Years 13 12.7%

31-40 Years 44 43.1%

41-50 Years 36 35.3%

>50 Years 9 8.8%

Type of Businesses

Furniture 26 25.5%

Fashion 25 24.5%

Craft 15 14.7%

other 36 35.3%

Average turnover per year

<300 Million 63 61.8%

300 Million-2.5

Billion 35 34.3%

2.5 Million - 10

Billion 4 39.0%

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2 I pay taxes voluntarily without coercion

2 5 4,57 0,554

3 I don’t have to spend a long time thinking about how I pay taxes

2 5 4,47 0,592

4 I consider paying taxes as my obligation as an Indonesian citizen

2 5 4,75 0,521

5 Paying Taxes is a natural thing for Indonesian citizens

4 5 4,73 0,448

Tax Compliance Total (KP) 2 5 4,60 2,189

6 I realize that calculating the incoming tax on business imposed is very important

4 5 4,62 0,488

7 I realize the importance of

depositing income tax on business following what has been calculated

4 5 4,67 0,474

8 I realize the importance of reporting income tax on my business

3 5 4,62 0,508

9 I know the risks if I don’t carry out my obligations as a taxpayer

3 5 4,47 0,671

10 I know well the tax rules that apply to my business

3 5 4,34 0,696

11 I can calculate how much tax I have to pay from my business income

3 5 4,38 0,704

12 I can communicate actively with the tax authorities when I find difficulties in the tax compliance

2 5 4,25 0,636

13 I can store tax transaction

documents properly, if they will be used in the future

2 5 4,71 0,519

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Tax literacy otal (LP) 2 5 4,51 3,099 14 I love Indonesia no matter what the

situation is

4 5 4,70 0,462

15 I feel proud to be an Indonesian citizen

3 5 4,74 0,465

16 Under no circumtances I am emotionally attached to Indonesia

1 5 4,56 0,791

17 I feel Proud of Indonesia’s achievements

3 5 4,63 0,579

18 The facts that I am Indonesian is the most critical part of my life

4 5 4,71 0,458

Patriotism total (PT) 1 5 4,66 1,946

Before testing the hypothesis, many assumptions are first tested, starting from residual normality with non-heteroscedasticity of residual variant and non-multicillinearity. The test results presented in Table 3 show that all assumptions for hypothesis testing using moderatde regression are met.

Table 3. Validity and Reliability Test Results

Asumsi Test Criteria Results Information

Normality Kolmogorov

Smirnov (KS) >0.05 0,255 Assumptions fulfilled Non

Heteroscedasticity Glejser test >0,05 0.838-0,999 Assumptions fulfilled Non Multikolinearity Variance inflation

factor < 10 1,024 Assumptions fulfilled Hypothesis testing in this study uses Moderate Regression Analysis (MRA). Table 4 shows that the model has an F-test = 28.224, which means literacy and patriotism simultaneously affect tax compliance. The adjusted R-square value of 0.350 means that only 35% of tax compliance is due to tax literacy, while the rest is caused by factors other than tax literacy.

Table 4. Moderation Regression Test Results

Variabel B Std. Error T Sig.

Tax literacy 0.425 0.056 7.526 0.000

Patriotism 0.045 0.091 0.492 0.624

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Patriotism x Tax literacy 0.09 0.033 2.727 0.008 F-Test : 28.224 R Square : 0.363 Adjusted R-square : 0.350

Hypothesis testing presented in table 4 shows that tax literacy has a significant positive effects on tax compliance ( β = 0.425; α = 0,000 ) so that H1 is accepted. Furthermore, hypothesis testing of the moderating variable shows that the interaction between patriotism and tax literacy influences tax literacy and tax compliance ( β = 0.090; α = 0,008 ). H2 is accepted so that the patriotism variable is proven to moderate tax literacy on tax compliance from taxpayers.

5. Discussion

The results of hypothesis testing indicate that tax literacy affects taxpayers’ tax compliance following the results of theh first hypothesis test (H1).Tax literacy is related to the knowledge and understanding of taxpayers who are pretty accurate about the taxation interests of taxpayers, which will affect tax decision. Tax-aware MSME taxpayers will find out the tax rate imposed on their income, calculate the taxes that must be paid, deposit taxes, and report taxes so taxpayers can fulfill their obligations as tax compliant taxpayers.

Taxpayers who know the tax system, tax requirements and risks received by taxpayers in carrying out their tax obligations.MSME taxpayer skills are also a literacy requirement. This skill can be done by filling out tax returns correctly, storing documents, and interacting with tax officers.

The results of hypothesis testing show that patriotism has a significant positive result.

Patriotism moderates and has a signficant relationship with tax literacy on tax compliance. This is in accordance with the formulatef hypothesis (H2). The form of tax patriotism is paying taxes.

Taxpayers who feel proud if they help the country in the form of paying taxes can be considered heroes or patriots of the nation.

The results of this test are also in line with the theory of social identity. In the theory of social identity, it is argued that patriotism, considered national identity, will affect the behavior of citizens; in this case, it affects the behavior of taxpayers in fulfilling their tax obligations.

The patriotism behavior of taxpayers accompanied by good tax literacy, the taxpayer will be able to encourage compliance to fulfil their tax obligations. Taxpayers who have good tax literacy and love for the country will know the risks that will be faced when they are registered as taxpayers.

6. Conclusion, implications, and limitations

Following the objectives to be achieved, this study first wants to examine the effect of tax literacy as a variable capable of influencing tax compliance and, secondly, examine the moderating role of patriotism on the effect of tax literacy on tax compliance. Ther results of the study show that tax literacy positively affects tax compliance, owner taxpayers who have good tax literacy tend to voluntarily and consciously comply with the tax regulations they impose and know the consequences that will be received if they violate tax provisions. Furthermore, the study also gave empirical proof that patriotism moderates tax literacy towards tax compliance. Taxpayers with high patriotic behavior followed by high tax literacy will be further encourage taxpayers to fulfill their tax obligations.

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This study has both theoritical and practical implications. The theoritical implications of this study can expand knowledge about the determinants of tax compliance from a behavioral perspective, considering that this research has succeeded in proving patritism to strenghthen the influence of tax literacy on tax compliance, especially among MSME enterpreneurs.

Meanwhile, the practical implications in this study are expected to be used for policymakers, namely the director general of taxes. By providing closer sociallization with taxpayers related to taxpayer literacy, in addition, programs related to patriotism among the community, including MSME actors such as basic introduction assistance programs for business management, administration, capital, and peer tax aspects in the business sector, continue to be carried out considering that they are proven to be able to strengthen the influence of tax literacy on tax compliance.

This research is inseparable from the limitations, namely the ability to generalize, considering that the tax subject used in this study are limited to individual taxpayers who are only engaged in trade MSMEs. Besides, the research indicators used in this study are still very narrow. Further research is expected to use broader indicators to provide quality results on the instruments tested to measure the variables studied. In addition, further research should be able to expand the scope of research by adding other research objects.

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