Tax Evasion, Tax Rate and Economic Stability
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The issue of tax evasion has become a major problem for governments. Nowadays, governments are actively trying to reduce the possibility that people misrepresent their income. Tax evasion refers to all illegal ways that people employ in order to avoid paying taxes. Underreporting income, profit or over reporting the amount of tax deductions are some well-known ways of misrepresenting tax liabilities. This paper attempts to study the relationship between tax evasion and tax rates and economic stability. Is higher taxes leads to more unreported activities? How does higher tax evasion affect economic stability? Is the causality run from tax evasion to economic activity or the other way around? This study attempts to examine the relationship between economic stability with tax evasion and tax rates using a fixed panel data model for a selected number of countries including OECD countries based on data comprised of the period of 1990 – 2013, by using Panel data technique. The main contribution of this paper will be the study of the relationship between tax evasion and economic stability. Results show that dominant negative relationship between taxes and output volatility, our estimation results show that tax ratio is positively and significantly related to economic stability and tax evasion is negatively and significantly related to tax income.
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