The Role of Financial Strain in Shaping Taxpayer Compliance: A Conceptual Review

Abstract

Tax revenue is vital for sustaining national development, yet achieving high levels of tax compliance remains challenging, particularly in regions marked by poverty and income inequality. Sabah, which records the highest poverty rate and some of the widest income disparities in Malaysia, presents a context in which financial strain may play a critical role in shaping taxpayer behaviour. This conceptual paper examines how financial strain influences individual tax compliance in Sabah, drawing on Prospect Theory to explain behavioural responses under economic pressure. Through a review of literature on tax compliance, financial strain, and behavioural decision-making, the study identifies gaps in current empirical understanding, especially in settings characterised by persistent socioeconomic hardship. The proposed framework suggests that financial strain can significantly reduce both the willingness and ability of taxpayers to meet their tax obligations, aligning with prior evidence linking financial dissatisfaction to noncompliance. Theoretically, the paper advances the application of behavioural economics to tax compliance research, while practically it offers insights for the Inland Revenue Board of Malaysia (IRBM) in developing more equitable and targeted compliance strategies. As a conceptual contribution, the study lays the groundwork for future empirical research aimed at validating the proposed relationships and deepening understanding of taxpayer behaviour in financially vulnerable contexts.