How CHAID analysis can assist revenue authorities in analysing tax compliance costs

Abstract

Tax compliance costs represent an economic burden to society and can result in reduced tax compliance behaviour. Traditional techniques used to establish the determinants of tax compliance costs include, inter alia, regression and simple descriptive statistics. This article explains how a Chi-square automatic interaction detection (CHAID) analysis, a decision tree modelling technique, was used to analyse the tax compliance costs of 10,260 individual taxpayers in South Africa. CHAID analysis provided granular insights beyond traditional techniques to enable a better understanding of the determinants which could lead to targeted support to enhance taxpayer compliance and reduce government collection costs.