The Effects of Financial Rewards and Penalties on Tax Evasion and Whistleblowing Intentions in Accra, Ghana

Abstract

The study investigates the influence of financial rewards and penalties on individuals’ intentions to report tax evasion. The research, involving 402 respondents in Ghana’s Accra Metropolitan District, uses regression analyses and statistical mediation to analyze cross-sectional survey data. Ghana’s Whistleblower Act of 2006 and the Revenue Administration Act of 2016 establish penalties for tax offenses and mechanisms to encourage truthful reporting. While the Act provides protections for whistleblowers, it faces hurdles such as a lack of confidence and cultural reluctance. The findings show that financial rewards have a limited impact on whistleblowing and tax evasion intentions, while penalties have a significant influence. This supports the deterrence theory of punishment, suggesting that individuals are deterred from engaging in illegal behavior when threatened with punishment. The study also highlights the role of financial rewards in shaping whistleblowing intention but suggests a combination of financial rewards and enforceable penalties to encourage whistleblowing and discourage tax evasion. The findings suggest integrating a model incorporating financial reward and penalties into tax laws, making it mandatory for individuals to report tax evasion, with failure resulting in punishment. This model could serve as a deterrent to individuals who would otherwise not report tax evasion activities.

PLAIN LANGUAGE SUMMARY

The study examines the effects of financial incentives and penalties and how they affect people’s intentions to report tax cheaters to the tax authorities (particularly in cases of close relationships) in a developing nation where the government is currently facing financial difficulties following the COVID-19 pandemic.

KEY FINDINGS

1. Financial rewards alone do not significantly influence whistleblowers’ decisions to report tax cheaters.

2. Penalties play a crucial role in deterring tax evasion, supporting the deterrence theory that suggests people are less likely to engage in illegal activities when faced with potential punishment.

3. Financial rewards do impact whistleblowing intentions, aligning with rational choice theory, but they do not influence tax evasion intentions.

IMPLICATIONS

1. The findings mostly support the theory that harsher punishments deter people from evading taxes but do not fully align with the theory that individuals weigh the potential benefits of tax evasion through financial reward.

2. Researchers suggest a strategy involving financial rewards and penalties to incentivize and discourage tax evasion, with mandatory reporting and punishment for non-compliance.

3. Punishing individuals who knowingly or deliberately fail to report tax cheaters could serve as a strong deterrent to existing and potential tax evaders.

4. The question that must be answered by future studies is how legally enforceable a system that punishes innocent individuals who knowingly or deliberately fail to report tax cheaters, especially if they are close associates and in highly polarized political environments.

Keywords:

• Tax evasion intention
• financial rewards
• penalties
• whistleblowing intentions
• rational choice theory
• deterrence theory

Disclosure statement

The author(s) reported no potential conflicts of interest.