The Costs and Benefits of Complying with the Tax System and their Impact on the Financial Management of the Small Firm

Empirical research carried out in different countries provides strong evidence that tax compliance costs impact more heavily on small firms. In addition, results showed that the regressivity of tax compliance costs according to size was even more accentuated after taking into consideration the effects of the cash flow and tax deductibility benefits of tax compliance. However, it has been suggested in the literature that business taxpayers could also be deriving managerial benefits as a result of complying with tax. These managerial benefits are expected to come in the form of a better knowledge of financial affairs and the improved decision-making that will be brought about by the more stringent record keeping imposed by tax requirements. The existing evidence indicates that these managerial benefits could be significant, particularly in smaller firms where accounting systems are initially un-developed. The paper argues that in spite of the abundance of descriptive research in the field, the incidence of tax compliance activities on small businesses is still incompletely understood. Very little explanatory research has attempted to study the relationships between potential influencing factors and the magnitude of tax compliance costs. Likewise, the managerial benefits of tax compliance are still largely un-explored. Fresh empirical data and further investigation are necessary in order to identify the conditions in which managerial benefits may be derived and measure their impact on the financial management of the small firm.