The Effect of Carrot and Stick Measures in Fostering Taxpayer Compliance in Tanzania: Evidence from a Laboratory Experiment

Abstract

With the increasing expectation and demand for the government to supply public goods such as water, health, education, and road infrastructure, the pressure to mobilize more domestic revenue in Tanzania cannot be overemphasized. Due to widespread tax evasion, concerted measures are required to foster taxpayer compliance. But how to achieve higher levels of taxpayer compliance with minimum administration costs remains an empirical question to be investigated. This study contributes to that strain by examining the effect of carrot and stick measures on fostering taxpayer compliance. The study used a laboratory experiment design, and was conducted on a sample of 201 undergraduate students from the University of Dar es Salaam. Using a bootstrapped binary logit model, the study found that both carrot and stick measures have a statistically positive effect on taxpayer compliance. However, the effects of these measures on tax compliance were not statistically different, implying that their effects are more or less the same; and that the choice of which measure to use remains largely a matter of choice as affected by the cost of implementation. Available literature suggests that implementation of stick measures in Tanzania is more costly than implementation of carrot measures due to their costs to the government and externalities such as the stress imposed on taxpayers.