Aggressiveness as Performance Signaling: Forced Distribution Rating System in Tax Authority

Heru Iswahyudi

MPRA Paper from University Library of Munich, Germany

Abstract: This article is aimed at examining whether introducing the forced distribution rating system (FDRS) in tax authority may improve performance and at exploring alternative explanations for the results utilizing the perspectives of signaling theory. Using Indonesian tax authority as case study and employing the interrupted time-series analysis on tax collection data, it is found that the adoption of FDRS may have worsened the already declining trend in collection. One of the possible explanations for this deterioration is that the introduction of FDRS, combined with the existing system of collection targets, may incentivize tax officials to demonstrate aggressive behaviors toward taxpayers as signals of performance with the desired outcome of being categorized as top performers under the FDRS. These behaviors may erode taxpayers’ trust in tax authority, diminish voluntary compliance, and encourage migration into the underground economy; thence spurring a vicious cycle: as the tax base is shrinking because taxpayers are going underground, tax revenue will decline thus prompting tax officers to signal their performance by behaving more aggressively toward taxpayers, hence encouraging more taxpayers to escape to the underground economy. It is important for tax authorities to implement performance evaluation systems which are conducive toward creating and maintaining trustworthy relationships between taxpayers and tax officers.

Keywords: Signaling Theory; Forced Ranking; Tax Compliance; Underground Economy; Trust in Tax Authority (search for similar items in EconPapers)
JEL-codes: H26 L25 M14 (search for similar items in EconPapers)
Date: 2021-07-27
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