Economic domination, moderating role of public spirit and determinants of income tax evasion among Palestinian SMEs

This study investigates the determinants of income tax evasion among Palestinian Small and Medium Enterprises (SMEs). Previous studies regarding the determinants of income tax evasion among SMEs are limited and results are somewhat inconsistent. The factors that determine SMEs tax evasion have not been sufficiently examined especially in the Palestinian context. This study extends Fischer model that is built on the integration of both Economic and Socio-Psychological theories by incorporating the Social Dominance Theory. It contributes to existing literature by
investigating the direct effect of economic domination and incorporating the moderating effect of public spirit. Therefore, this study hypothesises seven (7) factors affecting tax evasion, as well as six (6) hypotheses on the moderating effects of public spirit. The study employs questionnaire survey of 500 owners-managers of
SMEs listed in the Federation of Palestinian Chambers of Commerce, Industry, and Agriculture operating in West Bank, of which 184 responses (37%) are usable for analysis. The Partial Least Squares (PLS-SEM) was used to test the hypotheses. The
results show that probability of detection, tax penalty, tax fairness, peer influence, tax rate, and economic domination have a significant direct relationship with tax evasion. The findings also ascertained the considerable moderating effect of public spirit on the relationship between probability of detection, tax penalty, and tax fairness on income tax evasion. The findings of the present study provide important insights into the tax authority, policy makers, and future researchers in understanding the tax evasion of SMEs. In order to curtail tax evasion in Palestine, tax authority
should widen its audit, imposes more tax penalties, and publicise the information about detecting tax evaders to serve as warning to potential evaders. The current tax rate structure would be fairer if SMEs are given a lower tax rate to eliminate the perception of unfair tax burden.