Tax evasion: Empirical evidence from sub-Saharan Africa

Abstract

Tax is the income which is paid to the government in order to fulfill the need of the public. However tax evasion is the act of not paying the tax by use of illegal ways. Allingham and Sandmo being the first researchers studying the tax evasion found a relationship of tax evasion with low penalty fees and a low detection. The tax evasion basically is affected by various factors but it also affects many economic factors. Sub Saharan Africa being a developing region is facing the phenomenon of tax evasion in a crucial way. This study measures the impact of the tax evasion on the Gross Domestic Product (GDP) per capita of Sub Saharan Africa. The relationship between the GDP per capita and tax evasion is tested using the generalized least squared whereby it is found that there is a positive impact of tax evasion on the GDP per capita however the p-value states that the tax evasion is insignificant and is not an important component for the determination of the GDP per capita. Moreover in the presence of tax evasion, this study shows that GDP per capita has also a negative relationship with the Foreign Direct Investment (FDI), positive relationship the Gross Domestic Fixed Capital Formation (GDFCF), a favorable connection with the export, a negative relationship with the import, a positive impact on the inflation and a negative relationship with the government expenditure. To fight against tax evasion for the economic benefit of Sub Saharan Africa, it is advised to review the tax system, to implement strict and severe penalties and very high fines for tax evaders. Moreover, the tax authorities of Sub Saharan Africa need to appoint more experts in auditing department to be able to detect the non-compliance tax payers easily and rapidly