Does corruption cause tax evasion? Evidence from an emerging economy

Abstract

The purpose of this exploratory research is to examine the corruption-tax evasion nexus and to establish the strength of relationships among corrupting activities. The research applied structural equation modelling (SEM) on selected data from the World Economic Forum Executive (WEF) Opinion Survey on corruption activities and data on tax evasion triggering factors from the World Development Indicators (WDI) and the Bank of Ghana (BOG) to test two hypotheses. The test of the first hypothesis suggests that corrupting activities significantly cause tax-evading activities in Ghana, hence there is at least one corrupting activity triggering tax evasion. Testing the second hypothesis revealed that corruption in Ghana exhibits all of the five dimensions of corruption examined. Hence, there is correlation among the corrupting activities. The research is limited by the availability of data, hence only data on selected variables for the period were examined. The results are indicative that most emerging economies tend to have more than one type of dominating corruption dimension, which are tax-evading triggers. The study extends literature by examining the various dimensions of corruption, analysing the strength of their relationships and how they impact tax evasion in an emerging economy. By identifying and employing specific corrupting activities, there is a better understanding and appreciation of the corruption-tax evasion nexus in the revenue generation process. The study recommends that a comprehensive and effective tax evasion reduction strategy/policy should deal with tax-evasion triggered corruption from the triad perspectives of taxpayer, tax officials and government officials. This may aid emerging economies in the drafting of tax evasion and corruption reduction policies/programmes to ensure the achievement of Sustainable Development Goals (SDGs).