Card or cash? Evidence regarding consumers' cooperative value‐added tax compliance

• Published date: 01 September 2022
• Author: Youngrok Kim,Hongyu Wan,Minjo Kang
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/asej.12276

ORIGINAL ARTICLE

Card or cash? Evidence regarding consumers’cooperative

value-added tax compliance

Youngrok Kim

1,2

| Hongyu Wan

3

| Minjo Kang

4

1

Research Institute for Socionetwork Strategies, Kansai University, Suita, Japan

2

Osaka School of International Public Policy, Osaka University, Osaka, Japan

3

Department of Economics, Yonsei University, Seoul, Korea

4

Department of Taxation and Accounting, Dongduk Women’s University, Seoul, Korea

Correspondence

Youngrok Kim, Research Institute for Socionetwork Strategies, Kansai University, Suita, Japan.

Email: econ.maple@gmail.com

Abstract

Cashless payments discourage value-added tax (VAT) evasion through transaction

records; and they essentially require cooperation from consumers and small business

owners. As indirect VAT payers, consumers’payment methods decisively influence the

final VAT declaration. However, the literature has yet to investigate consumers’collusive

VAT evasion. This study uses data from approximately 7300 taxpayers as collected by

the National Survey of Tax and Benefit of South Korea to examine the impacts of per-

ceived trust paradigms on consumers’responses to payment methods when small business

owners offer discount benefits. The results reveal that perceived trust in government sig-

nificantly strengthens consumers’cooperative VAT compliance. We also discover that

when the discount amounts are higher, trust has a greater impact on cooperative VAT

compliance. The study contributes to the tax literature by demonstrating that trust can

improve consumers’cooperative VAT compliance.

KEYWORDS

collusive VAT evasion, consumers’tax behavior, cooperative VAT compliance, trust paradigm

JEL CLASSIFICATION

H26, D91

1|INTRODUCTION

In modern developed countries, both consumption and income taxes are important

in public finance. Since its first implementation in France in 1954, the value-added

DOI: 10.1111/asej.12276

© 2022 East Asian Economic Association and John Wiley & Sons Australia, Ltd.

Received: 2 June 2021; Accepted: 23 April 2022

Asian Economic Journal. 2022;36:337–359. wileyonlinelibrary.com/journal/asej 337

tax (VAT) has been extended to cover the entire European Union (Webley &

Ashby, 2010). Currently, the VAT is the largest tax source on consumption among

member nations in the Organization for Economic Co-operation and Development

(OECD), accounting for approximately 20.4% of total tax revenue in 2018

(OECD, 2020). As an OECD member, South Korea became one of the world’searli-

est adopters of VAT. It adopted the European VAT regime in 1977 as a general con-

sumption tax; in this case, the VAT was applied to the supplies and imports of goods

and services within the sovereignty of South Korea. Anyone who engages in the sup-

ply of goods or services independently in business is liable for the value-added tax

regardless of whether the action is intended forprofit. All domestic businesses supply-

ing taxable goods or services must register for VAT purposes, and generally, the

VAT is filed quarterly. The return deadline in Korea is 25 days from the end of the

period, and any associated VAT liability must also be paid by this deadline.

However, cash payments make it difficult for authorities to determine whether

small business owners have presented truthful VAT declarations. Thus, the gov-

ernment’s validation system and small business owners’integrity are deterrents to

reduce VAT evasion. Further, cashless payments establish a trail for underlying

transactions, and the use of credit and debit card payments, in particular, can dis-

courage VAT evasion (Immordino & Russo, 2018). Fortunately, with the devel-

opment of information technology and financial markets, cashless payments have

gradually become more predominant in market transactions.

Nevertheless, small business owners’underlying transactions might include

discounts to consumers on the premise of cash payments to hide authorities’tax

base. Non-compliant and self-seeking consumers might collusively evade the

VAT by accepting these business owners’offers. If consumers accept the dis-

count, small business owners can conceal these transactions instead of reporting

them to the government. Alternatively, consumers might choose to comply with

the VAT regime by rejecting such offers (hereafter referred to as consumers’

cooperative VAT compliance). From this perspective, how consumers choose to

pay determines whether small business owners evade VAT.

Many studies have examined the economic and psychological determinants

of income tax evasion (Kirchler, 2007; Kirchler et al., 2014), but studies on

VAT compliance are scarce. Moreover, previous VAT research has focused on

VAT evasion from the business owner’s perspective, but not from the con-

sumer’s collusive evasion point of view.

This study interprets the cooperative VAT compliance puzzle

1

with an over-

view of consumers’perspectives and focuses on the trust paradigm in shaping

consumers’cooperative VAT compliance context. While no direct punishment

1

Rational economic agents should engage with VAT evasion because consumers have no legal obligation to pay

VAT directly to the government and collusive tax evasion is not punishable by law. Nevertheless, some consumers

might choose cashless payments that deter business owners from evading VAT at the expense of the economic

benefits with zero risk. Hence, this study defines ‘the VAT compliance puzzle’as the consumer behavior that

cannot be explained through purely economic aspects.

338 KIM ET AL.