Tax evasion, financial development and inflation: Theory and empirical evidence

Abstract

Using a standard overlapping generations monetary production economy, faced with endogenously determined tax evasion by heterogeneous agents in the economy, we provide a theoretical model that indicates that both a lower (higher) level of financial development and a higher (lower) level of inflation leads to a bigger (smaller) shadow economy. These findings are empirically tested within a panel econometric framework, using data collected for 150 countries over the period 1980−2009 to enable a broad generalisation of the results. The results support the developed theoretical model, even after having accounted for the differences in the levels of economic development, the level of institutional quality that includes different tax regimes and regulatory frameworks, central bank participation in the economy as well as different macroeconomic policies.JEL Classification: C61, E26, P16 Keywords: Informal economy, financial development, inflation. * We would like to thank two anonymous referees for many helpful comments that tremendously improved the quality of the paper. However, any remaining errors are solely ours.

Financial development and tax revenues in Turkey: A non-linear cointegration analysis

“…The limited number of empirical studies have generally performed the panel data analysis and revealed that financial development affected indirect and direct tax revenues positively (see Ilievski, 2012;Petrescu, 2013;Capasso and Jappelli, 2013;Taha et al, 2013;Bittencourt et al, 2014;Akçay et al, 2016). In one of the early studies, Ilievski (2012) investigated the impact of the banking sector, stock market and financial liberalization on tax revenues in more than 100 countries during 1990-2008 period using the panel data analysis.…”

“…Taha et al (2013) analyzed the interaction between direct tax and financial sector development in Malaysia during 1997-2008 period employing ARDL (autoregressive distributive lag) bounds testing and Granger causality test and found a long run relationship between the financial system development and tax revenue and also a one-way causality between the stock market and direct tax revenue. In another study, Bittencourt et al (2014) examined the interaction between the financial development, tax evasion and inflation theoretically and empirically. Their theoretical model demonstrated that higher level of financial sector development led to lower shadow economy.…”

Economic Structure and Seigniorage: A Dynamic Panel Data analysis

“…We employ a large panel dataset from 144 countries, covering the period 1970-2009, to 5. See, for example, Roubini and Sala-i-Martin (1995), Nicolini (1998), and Bittencourt, Gupta, and Stander (2014). investigate the main determinants of seigniorage. 6 Our panel is unbalanced because some countries have limited observations in the sample, and the number of countries is much larger than the number of years.…”

“…8. This measure of the shadow economy was recently used by Bittencourt, Gupta, and Stander (2014). 9.…”

Tax Policy and Public Financial Management Architecture in Transitional States

“…Bittencourt et al (2014),Goel and Saunoris (2014), andPappa et al (2015) have all utilized these estimates in their empirical studies recently.…”