Abstract
The aim of this study is to build on the work of Riahi-Belkaoui (J Int Account Audit Tax 13: 135–143, 2004) and systematically examine on a cross-country basis, many of the key determinants of tax evasion identified by Jackson and Milliron (J Account Literat 5: 125–165, 1986). Based on data for 45 countries, the regression results show that non-economic determinants have the strongest impact on tax evasion. In particular, complexity is the most important determinant of tax evasion. Other important determinants of tax evasion are education, income source, fairness and tax morale. Overall, the regression results indicate that the lower the level of complexity and the higher the level of education, services income source, fairness and tax morale, the lower is the level of tax evasion. The findings are robust to various cross-country control variables, an alternative measure of tax evasion and several interactions.
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Notes
- 1.
Occupation status, sanctions, probability of detection and compliant peers are not considered due to the lack of available cross-country data for these determinants.
- 2.
In fact, by combining data from various countries with different tax schedules, this present study is able to separate-out the effects of marginal tax rates and income level.
- 3.
Assuming that measurement error has a normal distribution with a mean of zero and a variance of σ2, averaging of N observations will decrease the variance to σ2/N.
- 4.
- 5.
The 45 countries for which data are available for the study are represented by: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China (PRC), Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungry, Iceland, India, Indonesia, Ireland, Italy, Japan, Korea (South), Mexico, Netherlands, New Zealand, Norway, Philippines, Poland, Portugal, Russia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Kingdom, United States and Venezuela.
- 6.
Significant correlations are also found between tax evasion and some of the control variables. For instance, there are reasonably high correlations (p < 0.01) between TEVA and EDEV (r = −0.63), TEVA and COLONY (r = −0.48) and TEVA and LEGAL (r = −0.44). Correlations are also observed (p < 0.05) between TEVA and PROT (r = −0.29), TEVA and EUCAR (r = 0.29) and TEVA and LACR (r = 0.28). Finally, some marginal correlations are also detected (p < 0.10) between TEVA and EAPR (r = 0.22) and TEVA and CATH (r = 0.21). No significant correlations are found between TEVA and DEMOC, CULT, MUSL or OTHRD.
- 7.
Specifically, correlations (p < 0.01) are found between AGE and GEND (r = 0.44), AGE and ILEVEL (AGE and LILEVEL, r = 0.62; AGE and HILEVEL, r = −0.72), AGE and ISOURCE (AGE and AISOURCE, r = −0.60; AGE and SISOURCE, r = 0.49), AGE and MTR (r = 0.51), AGE and FAIR (r = 0.45), EDUC and FAIR (r = 0.55), ILEVEL and MTR (LILEVEL and MTR, r = 0.52; HILEVEL and MTR, r = −0.58), ISOURCE and FAIR (AISOURCE and FAIR, r = −0.54; SISOURCE and FAIR, r = 0.49) and FAIR and COMP (r = −0.49).
- 8.
These additional results are available from the author upon request.
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Appendix
Appendix
Data Description and Sources
Variable | Description | Source |
|---|---|---|
Tax evasion (TEVA) | • Country rating that tax evasion is minimal (on a scale from 1—strongly disagree to 7—strongly agree) averaged for 2002–2004. This scale was transformed by deducting the country score from 8 to obtaining an increasing scale of tax evasion • Country rating of tax evasion (on a scale from 0—common to 10—not common) averaged for 2002–2004. This variable was transformed to obtain an increasing scale of tax evasion | Global Competitiveness Report (World Economic Forum 2002, 2003, 2004) World Competitiveness Year Book (Institute of Management Development 2002, 2003, 2004) |
Age (AGE) | Percentage of the population which is greater than 65 years of age averaged for 2002–2004 | 2005 World Development Indicators (World Bank 2005a) |
Gender (GEND) | Percentage of the population which is female averaged for 2002–2004 | 2005 World Development Indicators (World Bank 2005a) |
Education (EDUC) | Country rating of the quality of the education system for a competitive economy (on a scale from 1—low to 7—high) averaged for 2002–2004 | World Competitiveness Year Book (Institute of Management Development 2002, 2003, 2004) |
Income level (ILEVEL) | • Proportion of household income going to the lowest 20 % of households (LILEVEL) averaged for 2002–2004 • Proportion of household income going to the highest 20 % of households (HILEVEL) averaged for 2002–2004 | World Competitiveness Year Book (Institute of Management Development 2002, 2003, 2004) |
Income source (ISOURCE) | • Employment by sector: agriculture percentage of total employment (AISOURCE) averaged for 2002–2004 • Employment by sector: services percentage of total employment (SISOURCE) averaged for 2002–2004 | World Competitiveness Year Book (Institute of Management Development 2002, 2003, 2004) |
Marginal tax rates (MTR) | The top marginal income tax rate for individuals of a country | 2005 World Development Indicators (World Bank 2005a) |
Fairness (FAIR) | Country rating of the fairness of tax policy (on a scale from 0—low fairness to 8—high fairness) for the 2002 year | IPS National Competitiveness Report (Institute for Industrial Policy Studies 2002) |
Complexity (COMP) | Country rating of tax system complexity (on a scale from 1—high complexity to 7—low complexity) averaged for 2003–2004 | Global Competitiveness Report (World Economic Forum 2003, 2004) |
Revenue authority contact (SELFA) | Dummy variable of 1 if the country has a self-assessment tax system, 0 otherwise | Organisation for Economic Co-operation and Development (2004) http://www.oecd.org/dataoecd/28/2/33866659.pdf PricewaterhouseCoopers (2004) KPMG (2003) http://www.kpmg.com.hk |
Tax morale (MORALE) | Country rating of cheating on taxes if you have the chance (on a scale from 1—never justifiable to 10—always justifiable) averaged for the 1981, 1990, 1995 and 1999 World Value Surveys. This variable was transformed to obtain an increasing scale of tax morale | Inglehart (2003) http://nds.umdl.umich.edu/cgi/s/sda/hsda?harcWEVS+wevs Inglehart et al. (2004) |
Economic development (EDEV) | Natural log of GDP per capita averaged for 2001–2003 | 2005 World Development Indicators (World Bank 2005a) |
Democracy (DEMOC) | Political rights index developed by Freedom House (on a scale from 1—high political rights to 7—low political rights), averaged for 2002–2004. This index was transformed to obtain an increasing scale of democracy | Freedom House (2005) |
Culture (CULT) | Ethnolinguistic fractionalization index measures the probability that two randomly selected individuals within a country belong to the same ethnic group. It is an index between 0 and 100, with 100 denoting lower fractionalization | Mauro (1995) |
Religion (RELIG) | The percentages of Protestants (PROT), Catholics (CATH), Muslims (MUSL) and Other Denominations (OTHRD) in 1980 or 1990–1995 for countries of recent formation | La Porta et al. (1999) |
Legal system (LEGAL) | Dummy variable of 1 if the country is a common law system country, 0 otherwise | La Porta et al. (1999) |
Colonial heritage (COLONY) | Dummy variable of 1 if the country was ever a colony, 0 otherwise | Barro and Lee (1994) |
Regional developing countries (REGION) | • Dummy variable of 1 if the developing country is in the East Asia and Pacific region (EAPR), 0 otherwise • Dummy variable of 1 if the developing country is in the Europe and Central Asia region (EUCAR), 0 otherwise • Dummy variable of 1 if the developing country is in the Latin America and the Caribbean region (LACR), 0 otherwise | World Bank Group—Data and Statistics (World Bank 2005b) http://www.worldbank.org/data/countryclass/classgroups.htm |
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Richardson, G. (2016). The Determinants of Tax Evasion: A Cross-Country Study. In: Dion, M., Weisstub, D., Richet, JL. (eds) Financial Crimes: Psychological, Technological, and Ethical Issues. International Library of Ethics, Law, and the New Medicine, vol 68. Springer, Cham. https://doi.org/10.1007/978-3-319-32419-7_2
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