Determinant of Tax Evasion of Category “A” Taxpayers in East Addis Ababa

Tax revenues are important income sources for governments in most countries. because of the shortage of full tax compliance, government budgets are unbalanced in most countries, and therefore the gap between revenue and expenditure is increasing. the main question that was trying to answer during this paper was “why do taxpayers evade taxes?” The study was designed to spot the determinants of evasion (focusing on category “A”) on government income in East Addis Ababa. A structured questionnaire was accustomed collect data from a sample of 371 taxpayers who were selected by employing a non-random sampling technique. A binary logistic regression model was employed to research the info and therefore the results of the study revealed that there's a statistically signi�cant association between evasion and eight determinant variables (tax education, service quality, tax rate, income level, and fairness of legal system, �nancial Constraint, audit, and penalty). evasion has positively suffered from the rate, income level, audit, and fairness of the legal system and is negatively in�uenced by �nancial Constraints, tax education, service quality, and penalty. supported the �nding of the study the subsequent policy recommendations are forwarded. These are the government should reduce the rate, and therefore the tax delivery system should be automated to make sure e�ciency and quality delivery among money others.


Introduction
Tax may be a system of payment that individuals and rms are legally required to form to the government.It is a compulsory transfer of cash from private individuals and groups or institutions to the government.Most people don't wish to pay taxes because, for this reason, it's hard for tax administrators to levy and collect taxes e ciently.In addition, taxing informal sectors may be a major challenge for tax administrations in both developed and developing countries and therefore the " scal gap" that arises from the failure to tax this sector can be quite large. (1)xation in developing countries may be a challenging topic and has attracted increasing attention within the last 20 years.During this period, many problems were observed like poor administration, failure to collect su cient tax revenues, and lack of government and economic stability. (2)e to the problems of tax avoidance and tax evasion inherent in all tax systems, tax compliance has become an increasing international concern for tax authorities and public policy makers as tax evasion seriously threatens the ability of governments to generate revenue. (3) developing countries, income tax evasion poses serious problems for tax administration and can impede government revenues. (4)veral researchers have been conducted on issues related to tax evasion and tax compliance in Ethiopia (example (2) , (6) , (7) , (9) , (11) , (12) , (16) , 17) , (18) and (19) ).They attempted a thorough review and most of the references dealt with most of the variables.However, factors such as marital status, industry, tenure, and quality of tax o ce service were not addressed.Therefore, this study includes these variables to identify key determinants of tax evasion in the Addis Ababa case and to examine control mechanisms to contain the problem.

Review Of Literature
Taxes are obligatory payments or donations from citizens to the government, with no direct repayment to the taxpayer.This tax imposes a special obligation on individuals to pay the tax if they are the taxpayer.A key theoretical principle is that citizens should be judged on their ability to pay which is considered a fair share.People in the same economic situation should be tested in the same way without distinction. (5)hiopia's tax history is related to the structure of the government and country.There is no credible Torquay reasoning to justify the relationship between administrative origin and taxation.Ethiopia's stateof-the-art tax system was introduced in the "early 1940s" when the government implemented tax reforms. (6) The history of increasing government revenues in the period after 1941 dates back to the issuance of Proclamation No. 8 of 1942.In the rst paragraph of the preamble of that proclamation, the Emperor stated that "to barter the establishment of Our Government, the substance of the country and therefore the well-being of Our People, land levies shall be levied."The revolutionary government changed the tax structure in 1976, replacing tax on land with a new tax on land use value for grazing and income from agricultural conditioning.The government only partially solved the problem of Homer-era tax collection, delegating the responsibility of collecting agricultural numbers and taxes to farmers' unions.The gross pro t soared to about 24% of GDP in 1988/89, while tax revenue stagnated at about 15% of GDP.Gross pro t and taxable pro t in 1974/75 were independently 13 and 11 percent of GDP, respectively.Despite changes to the tax structure in 1976, the government felt that the agricultural income tax was not being paid su ciently.This was largely based on the estimates of farmers' unions. (7)e current government, under the rati cation of the 1995 Ethiopian Constitution, gave civil and indigenous governments the power to impose and collect taxes.As a result, structural changes have resulted in some changes to the country's tax and customs policies.
The most signi cant changes have been made in tax law.This includes a reduction in the income tax rate from 40-30% (Income Tax proclamation No. 286/2002) and an adjustment of the tax rate for small and large mining industries.Activities (Mining Declaration No. 23/1996, amended), exemption from capital gains tax on houses used for residential purposes.Tax incentives have been introduced as a result of policies to encourage new investments (Investment Declaration No. 280/2002).Changes within the law were followed by other measures such as the introduction of the Taxpayer Identi cation Number (TIN), the introduction of the tax credit system, and the replacement of the disruptive tax with the VAT, which has become the government's main source of revenue.Also introduced was a turnover tax, emphasis on taxpayers' education, strong enforcement mechanisms, substantial reforms, and amendments within the tax laws to stay in pace with time and therefore the changing economic environment.This has caused increased e ciency and effectiveness in reducing fraud and smuggling.
Tax non-compliance takes many different forms.It can be intentional non-compliance, in which the taxpayer intentionally violates tax rules and regulations for pro t.The second concerns the type of unintentional non-compliance that would result from ignorance, negligence, or error in the application of tax laws.Any non-compliance by taxpayers leading to non-declaration / underreporting/taxable income leading to non-payment or underpayment of tax is considered tax evasion. (8)

Empirical Review
There is some research done in the area of determinants of evasion and its relationship.Due to tax evasion, tax revenues obtained from the government and public goods and services have been reduced every year in both developed and developing countries.
thiopia has the lowest tax/GDP ratio (10.7%) much lower than the average for sub-Saharan Africa and low-income countries in general, and tax evasion is a contributing cause.n empirical study of evasion as a positive association between tax rates and tax evasion. (13)This observation is consistent with the result of (14) which distinguishes the causes of evasion.He found that the higher the speed, the greater the taxpayer's ability to evade taxes, as it increases their income.
Factors associated with evasion behavior in Turkey using survey data and correlation analysis, and using multi-correlation techniques.The results show that income level can have a negative effect on evasion.As income increases, taxpayers exhibit tax compliance behavior rather than tax evasion and avoidance behavior. (15)ctors affecting the voluntary compliance behavior of taxpayers in the Southern Nation Nationalities People s` Regional State (SNNPRS), Ethiopia using a cross-sectional survey method research design and Pearson matrix and logistic regression model.The results of this study show that tax knowledge, simplicity of tax ling and administration, perception of justice and fairness, perception of government spending, auditability and so the in uence of the reference group has determined the factors affecting the voluntary compliance behavior of taxpayers. (16)sociation between key tax compliance variables and thus attitudes and behaviors of selected individual taxpayers and tax evaders towards tax evasion in Ethiopia, Amhara region.The study used a mixed approach, collecting data from both survey tools and taxpayer interviews.The results show that tax morale, tax fairness, and to a lesser extent, tax law enforcement and tax perception all directly and indirectly affect taxpayer compliance. (17)rthermore, (18) examined tax compliance and its determinants in the Kaffa, Bench Maji and Sheka Zones category of "B" corporate income tax payers, Ethiopia.Information is checked using an ordered logit model.The results of the ordered logistic regression show that tax compliance is positively affected by the education level of the taxpayer, the taxpayer's tax knowledge and awareness, the simplicity of the system legislation, taxpayer attitudes toward taxes, the perceived role of state spending, and reward systems for loyal taxpayers.However, the audit probability is negligible, which is contrary to the work of 16 .
Studies on the determinants of tax compliance behavior in the hypothetical tax system in the management case of Dire Dawa.The results show that tax compliance behavior is positively affected by the level of information and unfair treatment of taxpayers. (19)e study investigated the determinants of tax compliance in the case of Class "A" taxpayers in the Jimma area.Data were collected using a structured questionnaire.The results of the analysis show that age, gender, penalties, audits, simplicity, fairness, and government perception have an impact on tax compliance. (9)e general framework to be followed for reviewing the literature on the determinants of evasion is given by ( 13), ( 9), and ( 20).The researcher considers taxpayers' perception of tax evasion as a variable that is explained by many different factors; age, gender, status, education level, type of business, duration of business, income level, nancial constraints, tax fairness, the complexity of tax system, probability of being audited, penalty, tax knowledge, quality of service delivery, tax rates.

Research Methodology
This paper has interested in considering the relationship between the dependent variable (tax evasion) and the independent variables (factors), the quantitative research method is typically used.The data for this study were collected from primary and secondary sources.Primary data was collected through structured questionnaires, during which respondents were taxpayers (category "A") of the branch o ce.Secondary data was obtained from the existing o cial documents of the tax o ce, proclamation, regulation, directives, and annual reports from 2010 to 2012 E.C.

Sampling Technique and Sample Size
The taxpayers who were under this investigation have similar characteristics and they belong to one group by nature of liability, they are in the "A" category and the "small taxpayers" are supported with their annual transactions.The selection of entities was based on a non-random sampling technique due to the di culty of accessing all the taxpayers and the inconvenience to meet all within a speci c time.Thus, a non-random sampling technique was employed to accumulate the needed information through a structured questionnaire from the taxpayers; the info was collected from them once they come to the branch o ce, at the end of the month for declaring their tax.
The target population for this study incorporated category 'A' taxpayers of the branch o ce in East Addis Ababa's small taxpayer's branch o ce.The sample size decided supported precision rate and con dence level for all categories of taxpayers as follows: n = 385/(1+ (385-1)/10505) n = 371

Data Collection Method
Given the large number of people required for the survey and the limited time available, the researcher used a questionnaire method to collect information from taxpayers.To collect primary data, researchers used a structured questionnaire that was pre-tested on seven taxpayers of the branch o ce.
Due to the sensitive nature of this topic, the survey will not directly ask about evasion.Instead, ask simple, indirect questions such as "Have you ever been punished?"No one is penalized for unintentional tax evasion, so use it as a basis for gathering information about tax evasion.

Model Speci cation
If the variable has a binary outcome (that is, yes or no, success or failure), the binary logistic regression model is the higher model Gujarati (2004).
Studies with ordered outcomes are commonly analyzed using the most common method called the proportional odds logistic regression model.Maximum likelihood (ML) is a classical technique for estimating the unknown parameters of this model. (21) evasion problem is that the two kind's attitudes matter in their nature; taxpayers may comply or evade.Taxpayers are perceived as evasive in their attitudes towards their tax obligations and in their willingness to comply with tax laws.Based on this, taxpayers were divided into two levels of compliance, taxpayers were penalized and forced to pay their liabilities during the scal year, and compliant taxpayers pay their tax liabilities according to the tax law without any enforcement.
Taxpayers are considered legally compliant when they assess themselves under tax laws and regulations without law enforcement by reporting their correct taxable income to the Internal Revenue Service.In contrast, taxpayers may become non-compliant, those who are unwilling to pay their taxes liability on time and correct amount, when tax authorities, through the application of tax audits, coerce those who are unwilling to pay their tax obligations on time.Therefore, the variables (i.e., tax evasion) can be discrete and dummy variables measured by the binary outcome variable, so the researcher assumes zero (0) for compliant attitude (not penalized and forced to pay), otherwise one (1).
Logistic regression is therefore a good model for understanding how explanatory variables (factors that in uence tax evasion) affect the probability of tax evasion for individual taxpayers.
Because a binary outcome variable violates some assumptions of linear regression models like (not normal).The logit function derived from the odds ratio is: Equation ( 1) also can be expressed in terms of probability as follows: Where p(yi = 1) is the probability of getting a non-compliance attitude (i.e.penalized) and 1-p(yi = 1) is the probability of having a compliance attitude (i.e.not penalized by the tax o ce).
This model shows that an odd ratio does not only depend on variables incorporated in the model but also on other factors which are not included in the equation.
The predicted probability of evasion attitude of taxpayers, therefore, is often expressed as: The predicted probability of tax compliant attitude of taxpayers can be expressed as: Therefore, the study used the following binary logistic regression model to examine the association between the determinant factors and taxpayers' tax evasion perception in the East Addis Ababa Small Taxpayers branch o ce.The model is as follows: In this equation, TE is that the variable, called evasion (evade or not), and Xi represents the independent variables.

Results And Discussion
Before evaluating the effect of each explanatory variable in the model, it was very important to determine whether the model would improve its ability to predict outcomes.A statistically signi cant chi-square statistic (p < 0.05) indicates that the nal model signi cantly improves the baseline intercept model.
As the model summary above shows, the likelihood ratio for the chi-square statistic (116.72) is high and statistically signi cant at the 5% signi cance level.This indicates that the included parameters provide better predictions compared to the null model with no predictors.
According to the (22) criteria for the best-tting model (pseudo R2 values between 0.2 and 0.4 are considered to be a good t), we found the overall t of the logit model to be worthwhile.Because the regression results model shows that the pseudo R2 (0.26) satis es the above assertion.Multicollinearity happens while or greater explanatory variables are notably correlated to every other.Therefore, the variance in ation factor (VIF) can be customized to detect the multicollinearity diagnostic for independent variables.

VIF (variance in ation factor
) is a hallmark of how much of the in ation of the standard error could be caused by collinearity.As stated by (23), if the value of VIF is less than 10, then no multicollinearity problem exists.
As re ected in the table above, the result con rms that the VIF for all factors is less than 10.Since the variance in ation factor is less than the cutoff point, this indicates that all variables are relevant and multicollinearity is not there since the variance in ation factor (VIF) for each variable is less than the cutoff point 10.

Heteroskedasticity test
To test the Heteroskedasticity of variables of the research, the researcher used the Breusch-pagan test.This test tells us that the variance remains constant for all variables.The output result is re ected in gure (1) below; The Breusch-pagan test shows the absence of Heteroskedasticity since chi-2 is greater than 0.05.

Regression Results
To test the hypothesized relationships between the independent variables (age, gender, marital status, education, income, business type, duration in the business, tax knowledge, tax fairness, complexity of tax system, tax rate, nancial constraint, service delivery, penalties, audit) and the dependent variable (taxpayers' tax evasion perception), the binary logistic regression analysis was conducted.
The output from this analysis, a beta coe cient, provides an assessment of the signi cance, the impact of the explanatory variables on the dependent variable, level of likelihood, and the pseudo R squared which indicates the model tness.In the regression result, the independent variables may have a positive or negative coe cient, which describes the nature of the effect that they exerted on the dependent variable.
The independent variable with negative coe cients implies that it hurts the dependent variable and vice versa.
The rst iteration (called iteration 0) is the log-likelihood of the "null" or "empty" model; that is, a model with no predictors.At the next iteration, the predictor(s) are included in the model.At each iteration, the log-likelihood increases because the goal is to maximize the log-likelihood.
Prob > chi2 is the probability of obtaining the chi-square statistic given that the null hypothesis is true.This is, of course, the p-value, which is compared to a critical value to determine if the overall model is statistically signi cant.The likelihood ratio chi-square of 116.72 with a p-value of 0.0000 tells us that the model as a whole is statistically signi cant.The regression result shows that there are eight independent variables including the fairness of the tax system, income level, tax rate, tax education, nancial constraint, audit, penalty, and service quality in the models that have a signi cant in uence on tax evasion at a signi cance level of 5%.
The results show that sex, age, marital, education, complexity, business sector, and duration are not important factors in determining tax evasion at a 5% signi cance level.Accordingly, nancial Constraint, tax education, service quality, and penalty are negatively associated with tax evasion, while the fairness of the tax system, income level, audit, and the tax rate are positively associated with tax evasion.That means, that tax knowledge, improved service delivery and absence of liquidity ( nancial constraint) will reduce tax evasion; meanwhile, better income levels, high tax rates, unfair tax, and poor audit regime will increase tax evasion.
The variable that in uences tax evasion perception of taxpayers are education level of taxpayers, which is positive and (p = 0.05) signi cant at a 1% level of signi cance, this indicates that a one-year increase in education will lead to 0.25 units increase in tax evasive holding all other variables constant.The other variable that in uences tax evasion is the taxpayer's knowledge of tax rules and regulations (β = − .47380,p = 0.019).This means that; when the taxpayers' know-how and understandings of tax rules are relatively high then the tax evasion perception of the taxpayer decreases by 0.47 units, other factors held constant.
Financial constraint is the other signi cant factor (β = − .69,p = 0.000, and marginal effect = − .1643617),for every nancial constraint that happens, the probability of tax evasion perception of taxpayers decreases by 16.4%, other factors being at their margin; when every nancial constraint will go on, the taxpayer ight from evading tax.Tax fairness was found to have a signi cant impact on tax evasion.The result indicates that when the tax system is not fair, the probability of tax evasion perception of taxpayers increases by about 10.1%.
Another signi cant factor is quality when quality service is delivered to taxpayers, the Probability of the taxpayers being evasive is decreased by 12.0%, holding all other factors constant.The tax rate is one of the factors that determine tax evasion.A regression table shows that a one percent increase in marginal tax rate will encourage tax evasion by 15.4%, other factors being constant.
Income level was found to be signi cantly determining tax evasion at a 5% level of signi cance with a marginal effect of.0977819.The result of the regression table tells us when an increase in the income level of taxpayers, the probability of taxpayers' tax evasion perception also increases by about 9.8%.The result of the tax audit was found to be positive and signi cantly determined tax evasion.Other factors remain the same when the probability of being audited is high the probability of tax evasion perception of taxpayers increases by 11.8%.The penalty of a taxpayer was also found that hurts the tax evasion behavior of taxpayers at a 5% level of signi cance.

Fairness of tax system
The logistic regression result shows that the relationships of tax evasion regarding attitudes toward the fairness of the tax system (β4 = 0.42) with marginal effect (0.10094) are positive and signi cant, holding other explanatory variables constant when an increase in the perception of the tax system is unfair, the probability of tax evasion perception increase by about 10.1%.This means that when taxpayers feel the tax system is fair their willingness to pay taxes is also increased.The result is consistent with the study (9)   , (17) , and (19) .

Tax rate
Tax rate (ß =.65242) and marginal effect (.1540994) have a positive and signi cant association with tax evasion perception.This result suggests that a one percent increase in marginal tax rate will encourage tax evasion by 15.4%.This implies that if the government increases the tax rate, the probability of being at a higher tax evasion level is realized.This result is consistent with (24) .

Income level
The coe cient of income level is.41398 and its marginal effect is (.0977819).This means that there is a positive signi cant relationship between the income level of taxpayers and tax evasion.This implies that holding other explanatory variables constant when the income level of taxpayers increases the probability of taxpayers' tax evasion perception also increases by about 9.8%.The result is contrary to the work of (15) .

Tax o ce quality service delivery
The tax o ce's good quality service delivery has a statistically negative (ß= -0.51) with a marginal effect of (-.1202483), the P-value is 0.002, which is less than 0.05 signi cant levels.This implies that improved service delivery decreases the probability of tax evasive behavior of individual taxpayers by 12.0%.This result is consistent with the nding of (19) .
Tax knowledge (Tax Education) The binary logistic result shown in Table (above) revealed that tax evasion was in uenced by taxpayers' knowledge (β =-.47380, P < 0.05) with a marginal effect of (-.111912).It was found to have a negative and signi cant effect on the tax evasion behavior of taxpayers at a 5% level of signi cance.
This implies that as the individual's tax awareness improves, the tax evasive behavior of the individual decrease by 11.2%, other factors being constant.This result is also consistent with (17) and (19) .

Personal nancial constraints
As shown in the regression table, the explanatory variable nancial constraint was found to be a negative and statistically signi cant relationship with tax evasion at a 5% signi cance level.The ordered regression result (β= − .6958697)with marginal effect (-.1643617) indicates that an increase in nancial constraint causes tax evasion behavior of the taxpayer to decrease by 16.4%, other factors being constant.The result is at odds with the study of (25) (26) and (27) , people who face personal nancial problems are likely to be more prone to evade tax.

Audit coverage
The regression analysis states that lower audit regimes have a positive (ß =.5000) and very strong signi cant relationship with tax evasion perception of taxpayers at a 5% signi cance level.The marginal effect (.11810) indicates that other factors remain the same when the probability of being not audited increases by one unit the probability of tax evasion perception of taxpayer increases by 11.8%.This result is consistent with that of (13) , (28) , and (29) the probability of being audited, the more positive compliance attitude of taxpayers, and a higher audit regime reduce tax evasion signi cantly.

Penalties
Regarding penalty (ß =-.2802), it has a negative and signi cant association with tax evasion at 5% signi cance.This implies that an increase in the penalty of tax non-compliant taxpayers and the likelihood of taxpayers' tax evasion perception decreases by about 6.6%.This result is consistent with that of (13) , (9) , and (17) .

Conclusions And Recommendations
To achieve our goal, we collected primary data was collected using closed-ended and Likert-scale questionnaires and analyzed them using a logistic regression model.
A result of the Binary logistic regression analysis suggested that likelihood of tax evasion is signi cantly in uenced by the tax rate, audit, penalty, tax knowledge, nancial constraint, quality service, fairness of tax, and income level.This study similarly evidenced that, other variables such as duration, complexity, trade sector; age, sex, and marital status of taxpayers were not signi cant factors of tax evasion.
The ndings of the study showed that tax evasion has positively affected by the tax rate, income level, audit, and fairness of the tax system and is negatively in uenced by nancial Constraints, tax education (knowledge), penalty, and service quality of the tax o ce.The results of this study are in line with the nding of previous researchers like (6) , (13) , (25) , (30), and (31) .
To minimize tax evasion the government should focus on four issues, tax education, service delivery, law enforcement, and tax policy change.The tax o ce provides training to taxpayers and an ongoing face-toface awareness program on the consequences of violating tax laws, using various means such as television, magazines, radio, and the use of other means.In addition, the tax o ce should educate taxpayers on how to keep records of income and expenses.
A trend of tax evasion by taxpayers is based on the perception that their branches are not providing good service to their customers.Branches, therefore, need to improve the e ciency and effectiveness of their service delivery to taxpayers.
Tax o ces need to expand their tax networks by analyzing current tax rates and reducing existing tax rates to improve revenues, thereby absorbing more taxpayers into the tax system and ensuring tax compliance.Lowering the tax rate would help take the burden off the few taxpayers who feel that paying their taxes is an obligation to the public.
We recommend that tax authorities practice rigorous audit detection methods and detect fraud in tax authorities.The tax o ce must also impose penalties, there should be moderate and appropriate levels of penalties executed on a tax evader and publicized o cially through television, radio, and magazines.This increases awareness of the consequences of tax evasion and encourages voluntary compliance.

Declarations
Competing interests: The author declares there are no competing interests in this research paper.Coe cient of determination. Figures