Tax evasion and financial development in Asean-5
DOI:
https://doi.org/10.37134/jcit.vol7.3.2017Keywords:
Tax evasion, Modeified-Cash-Deposit-Ratio, Financial development, ASEAN-5Abstract
The estimated total tax evasion as reported by the Tax Justice Network in 2011 is in the excess of USD3.1 trillion or about 5.1% of world’s GDP. Tax evasion is a crime and tax revenue losses have negative consequences to the government ability to fueled economic growth by providing enough public infrastructure and other services. In this study we have estimated the share of tax evasion to the official economy for five ASEAN economies, namely; Indonesia, Malaysia, the Philippines, Singapore and Thailand for the period 1980-2013. Tax evasion was calculated from the estimated size of the shadow economy using the modified-cash-deposits-ratio (MCDR) approach suggested by Pickhardt and Sardia (2011). We investigate the contention made by Blackburn et al. (2012) and Bose et al. (2012) that financial development can mitigate tax evasion – higher level of financial development lead to lower level of tax evasion. Employing the pooled mean group estimator (PMG), our results show that there is a non-linear long-run relationship between tax evasion and financial development in ASEAN-5 economies, an inverted U-shaped curve, suggesting that at lower (higher) level of financial development commensurate with higher (lower) level of tax evasion. One policy implication from this study is that the financial sector in ASEAN-5 economies can play an important role in reducing tax evasion by improving the accessibility to financing and to the credit market.
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References
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critical assessment. Review of Income and Wealth, 53(2), 363-371.
Ahumada, H., Alvaredo, F., & Canavese, A. (2008). The monetary method to measure the shadow economy: The
forgotten problem of the initial conditions. Economics Letters, 101, 97-99.
Berger, W., Pickhardt, M., Pitsoulis, A., Prinz, A., & Sarda, J. (2014). The hard shadow of the Greek economy: New
estimates of the size of the underground economy and its fiscal impact. Applied Economics, 46(18), 2190-2204.
Blackburn, K., Bose, N., & Capasso, S. (2012). Tax evasion, the underground economy and financial development.
Journal of Economic Behavior & Organization, 83, 243-253.
Bose, N., Capasso, S., & Wurm, M.A. (2012). The impact of banking development on the size of shadow economies. Journal of Economic Studies, 39(6), 620-638.
Breusch, T. (2005a). The Canadian underground economy: An examination of Giles and Tedds. Canadian Tax
Journal, 53(2), 367-391.
Breusch, T. (2005b). Australia’s cash economy: Are the estimates credible? The Economic Record, 81, 394-403.
Breusch, T. (2005c). Estimating the Underground Economy Using MIMIC Models. Canberra: The School of Economics, The Australian National University,
Caballe, J., & Panades, J. (2004). Inflation, tax evasion and the distribution of consumption. Journal of
Macroeconomics, 26, 567-595.
Cebula, R.J. (1998). Determinants of aggregate income-tax-evasion behavior: The case of the US. BNL Quarterly
Review, 206, 273-290.
Cebula, R., & Foley, M. (2010). Personal income tax evasion determinants revisited: An exploratory study using
newly available data. Academy of Economics and Finance Journal, 2, 17-24.
Crane, S.E., & Nourzad, F. (1986). Inflation and tax evasion: An empirical analysis. The Review of Economics and
Statistics, 68(2), 217-223.
Engle, R.F., & Granger, C.W.J. (1987). Co-integration and error correction: Representation, estimation and testing.
Econometrica, 55, 251-276.
Feld, L.P., & Frey, B.S. (2006). Tax evasion in Switzerland: The roles of deterrence and tax morale (Working Paper Series No.284). Switzerland: Institute for Empirical Research in Economics, University of Zurich.
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Journal of Public Economics, 93, 855-866.
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Hanousek, J., & Palda, F. (2015). The evasional Kuznets curve: A possible shadow economy dynamics during the
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Hendry, J.S. (2012). The price of offshore revisited. The Tax Justice Network.
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Kafkalas, S., Kalaitzidakis, P., & Tzouvelekas, V. (2014). Tax evasion and public expenditures on tax revenue
services in an endogenous growth model. European Economic Review, 70, 438-453.
Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90, 1-44.
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Levin, A., Lin, C.F., & Chu, C.S.J. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties.
Journal of Econometrics, 108, 1-25.
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cointegration. Journal of Applied Econometrics, 14, 563-577.
Maddala, G.S., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test.
Oxford Bulletin of Economics and Statistics, 61, 631-652.
Martinez-Vazquez, J. (2011). Taxation in Asia. Philippines: Asian Development Bank.
Pedroni, P. (2004). Panel cointegration: Asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20, 597-625.
Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61, 653-670.
Pesaran, M.H., Shin, Y., & Smith, R.J. (1999). Pooled mean group estimation of dynamic heterogeneous panels.
Journal of the American Statistical Association, 94, 621-634.
Pickhardt, C., & Sarda, J. (2011). The size of the underground economy in Germany: A correction of the record and new evidence from the modified-cash-deposit-ratio approach. European Journal of Law and Economics, 32(1), 143-163.
Pickhardt, C., & Sarda, J. (2015). Size and causes of the shadow economy in Spain: A correction of the record and
new evidence from the MCDR approach. European Journal of Law and Economics, 39(2), 403-429.
Richardson, G. (2006). Determinants of tax evasion: A cross-country investigation. Journal of International
Accounting, Auditing and Taxation, 15, 150-169.
The Tax Justice Network. (2011). The cost of tax abuse: A briefing paper on the cost of tax evasion worldwide. The
Tax Justice Network.
Zucman, G. (2013). The missing wealth of nations: Are Europe and the U.S. net debtors or net creditors? Quarterly Journal of Economics, 128(3), 1321-1364.
critical assessment. Review of Income and Wealth, 53(2), 363-371.
Ahumada, H., Alvaredo, F., & Canavese, A. (2008). The monetary method to measure the shadow economy: The
forgotten problem of the initial conditions. Economics Letters, 101, 97-99.
Berger, W., Pickhardt, M., Pitsoulis, A., Prinz, A., & Sarda, J. (2014). The hard shadow of the Greek economy: New
estimates of the size of the underground economy and its fiscal impact. Applied Economics, 46(18), 2190-2204.
Blackburn, K., Bose, N., & Capasso, S. (2012). Tax evasion, the underground economy and financial development.
Journal of Economic Behavior & Organization, 83, 243-253.
Bose, N., Capasso, S., & Wurm, M.A. (2012). The impact of banking development on the size of shadow economies. Journal of Economic Studies, 39(6), 620-638.
Breusch, T. (2005a). The Canadian underground economy: An examination of Giles and Tedds. Canadian Tax
Journal, 53(2), 367-391.
Breusch, T. (2005b). Australia’s cash economy: Are the estimates credible? The Economic Record, 81, 394-403.
Breusch, T. (2005c). Estimating the Underground Economy Using MIMIC Models. Canberra: The School of Economics, The Australian National University,
Caballe, J., & Panades, J. (2004). Inflation, tax evasion and the distribution of consumption. Journal of
Macroeconomics, 26, 567-595.
Cebula, R.J. (1998). Determinants of aggregate income-tax-evasion behavior: The case of the US. BNL Quarterly
Review, 206, 273-290.
Cebula, R., & Foley, M. (2010). Personal income tax evasion determinants revisited: An exploratory study using
newly available data. Academy of Economics and Finance Journal, 2, 17-24.
Crane, S.E., & Nourzad, F. (1986). Inflation and tax evasion: An empirical analysis. The Review of Economics and
Statistics, 68(2), 217-223.
Engle, R.F., & Granger, C.W.J. (1987). Co-integration and error correction: Representation, estimation and testing.
Econometrica, 55, 251-276.
Feld, L.P., & Frey, B.S. (2006). Tax evasion in Switzerland: The roles of deterrence and tax morale (Working Paper Series No.284). Switzerland: Institute for Empirical Research in Economics, University of Zurich.
Fisher, I. (1911). The Purchasing Power Parity of Money: Its Determination and Relation to Credit, Interest and Crisis. New York: MacMillan.
Fisher, R.A. (1932). Statistical Methods for Research Worker. Edinburgh: Oliver and Boyd.
Gatti, R., & Honorati, M. (2008). Informality among formal firms: Firm-level, cross-country evidence on tax compliance and access to credit (Policy Research Working Paper 4476). New York: The World Bank.
Gordon, R. & Li, W. (2009). Tax structures in developing countries: Many puzzles and a possible explanation.
Journal of Public Economics, 93, 855-866.
Gravelle, J.G. (2015). Tax havens: International tax avoidance and evasion (Congressional Research Service 7-5700). CRS Report Prepared for Members and Committees of Congress, Washington, D.C., USA.
Hanousek, J., & Palda, F. (2004). Quality of government services and the civic duty to pay taxes in the Czech and
Slovak Republics, and other transition countries. Kyklos, 57, 237-252.
Hanousek, J., & Palda, F. (2015). The evasional Kuznets curve: A possible shadow economy dynamics during the
transition. Japanese Journal of Comparative Economics, 52(1), 1-17.
Hendry, J.S. (2012). The price of offshore revisited. The Tax Justice Network.
Im, K., Pesaran, M.H., & Shin, Y. (2003). Testing for unit roots in heterogenous panels. Journal of Econometrics, 115, 53-74.
Johannesen, N. (2014). Tax evasion and Swiss bank deposits. Journal of Public Economics, 111, 46-62.
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamic and Control, 12(2-3), 231-254.
Kafkalas, S., Kalaitzidakis, P., & Tzouvelekas, V. (2014). Tax evasion and public expenditures on tax revenue
services in an endogenous growth model. European Economic Review, 70, 438-453.
Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90, 1-44.
Kirchgassner, G. (2010). Tax morale, tax evasion and the shadow economy (Discussion Paper No.2010-17). Switzerland: Department of Economics, University of St. Gallen.
Loayza, N.V., & Ranciere, R. (2004). Financial development, financial fragility and growth. Journal of Money, Credit
and Banking, 38(4), 1051-1076.
Levin, A., Lin, C.F., & Chu, C.S.J. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties.
Journal of Econometrics, 108, 1-25.
MacKinnon, J.G., Haug, A.A., & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for
cointegration. Journal of Applied Econometrics, 14, 563-577.
Maddala, G.S., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test.
Oxford Bulletin of Economics and Statistics, 61, 631-652.
Martinez-Vazquez, J. (2011). Taxation in Asia. Philippines: Asian Development Bank.
Pedroni, P. (2004). Panel cointegration: Asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20, 597-625.
Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61, 653-670.
Pesaran, M.H., Shin, Y., & Smith, R.J. (1999). Pooled mean group estimation of dynamic heterogeneous panels.
Journal of the American Statistical Association, 94, 621-634.
Pickhardt, C., & Sarda, J. (2011). The size of the underground economy in Germany: A correction of the record and new evidence from the modified-cash-deposit-ratio approach. European Journal of Law and Economics, 32(1), 143-163.
Pickhardt, C., & Sarda, J. (2015). Size and causes of the shadow economy in Spain: A correction of the record and
new evidence from the MCDR approach. European Journal of Law and Economics, 39(2), 403-429.
Richardson, G. (2006). Determinants of tax evasion: A cross-country investigation. Journal of International
Accounting, Auditing and Taxation, 15, 150-169.
The Tax Justice Network. (2011). The cost of tax abuse: A briefing paper on the cost of tax evasion worldwide. The
Tax Justice Network.
Zucman, G. (2013). The missing wealth of nations: Are Europe and the U.S. net debtors or net creditors? Quarterly Journal of Economics, 128(3), 1321-1364.
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Published
2017-09-13
How to Cite
Habibullah, M. S., Baharom, A. H., Din, B., & H. Ibrahim, M. (2017). Tax evasion and financial development in Asean-5. Journal of Contemporary Issues and Thought, 7, 20–32. https://doi.org/10.37134/jcit.vol7.3.2017
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