Managers or Corporates?: Curbing Non-compliance through Corporate Income Tax Penalty

Abstract

Governments normally impose tax penalties for tax non-compliance. They can either impose financial corporate income tax penalties on corporates or tax managers in cases of corporate income tax non-compliance. However, the effectiveness of these corporate income tax penalty incidences remains largely unknown. This paper examines their effectiveness experimentally. In all, 100 Bachelor of Commerce second-year students at the University of Dar es Salaam participated in the laboratory experiment. The participants were randomly assigned into two groups: of managers and of owner-managers. Then the two groups were subdivided randomly into two groups based on corporate income tax penalty incidences: corporate income tax penalty imposed on managers and corporate, respectively. The study suggests that corporate income tax penalties imposed on managers may be more effective in enhancing corporate income tax compliance in both manager and owner-manager run corporations. Tax authorities should impose corporate income tax penalties on individuals responsible. The study contributes to limited corporate income tax literature, particularly in helping to reconcile the mixed results of prior theoretical research given fixed incentives. Also, it provides the first experimental evidence on the relevance of corporate income tax penalty incidence in the context of Tanzania. Finally, it adds to the scarce corporate income tax compliance literature and to the few studies on this aspect from developing countries.