Tax Evasion, Capital Flight and Growth of Developing Countries
PhD Student & lecturer,
Accounting, Management & Marketing
University of Yaoundé II, Soa, Cameroon
With reports of frequent financial frauds and scandals in the world, I explore, in this second of a three-part-series, what other authors have written on tax evasion, capital flight, growth of developing countries and the theories of Allingham and Sandmo models.
Perspectives of other writers
In this section, I refer to a selection of authors who have written on tax evasion and avoidance, and how it affects the revenue collection and the impact on governments’ activities. The authors include: Clotfelter (1983), Dubin and Wilde (1988) Feinstein (1991), Braithwaite (2009), Johannesen and Zucman (2014), Coechon (1992) and Slemrod (2004).
As already stated, tax evasion happens when individuals, businesses or corporations fail to comply with their tax obligation. Tax evasion, however, is a vast topic, a phenomenon that is complex and here to stay. But researches, such as Allingham and Sandmo are helping us to understand this phenomenon and how to develop further research.We have noticed that since Michael Allingham and AgnarSandmo launched their modern analysis on tax evasion in 1972 there has been an explosion in this field of research.
James Alm (2012) assesses the learnings about tax evasion that have been acquired since Michael Allingham and Agnar Sandmo launched the modern analysis of tax evasion in 1972. Alm focuses on three specific questions and the answers to these questions that have emerged over the years:
· First, how do we measure the extent of evasion?
· Second, how can we explain these patterns of behaviour?
· Third, how can we use these insights to control evasion?
There are still many unanswered questions that need further research such as: How much evasion really occurs nationally and locally? Do higher tax rates encourage/discourage compliance? How effective are penalty rates? What about audit rates and targeted, announced audit programs? What is the actual magnitude of any individual response? What are costs versus benefits of policies? What are distributional effects of evasion, and of policies to reduce evasion?
On their own part, E. Kirchler, B. Maciejovsky, F. Schneider, (2001) looked at tax evasion from an economic point of view. They argued that legal considerations apart, tax avoidance, tax evasion and tax flight have similar effects, such as a reduction of revenue yields, which are based on the same desire to reduce the tax burden. The legal differences and moral concerns mean that individuals may perceive them as different and as unequally fair. The results indicate that everyday representations differ with respect to tax avoidance, tax evasion, and tax flight. While tax evasion was perceived negatively, tax flight was perceived neutrally, and tax avoidance was perceived positively. It could be shown that despite that tax avoidance, tax evasion, and tax flight lead to similar effects on revenue yields, taxpayers discriminate between them and evaluate them differently. Moreover, it could be shown that these evaluations depend, for instance, on personal affectedness, experience, profession, and knowledge.
Luigi Alberto Franzoni (1999) offers an overview of the theoretical and empirical research on tax evasion, delineating the variety of factors affecting noncompliance and examining possible remedies. Particular emphasis is placed on the institutional and procedural rules governing the tax enforcement policy. It cannot be overstated that tax evasion is a complex phenomenon that cannot be eradicated by marginal changes in enforcement practice. The empirical evidence suggests that a stricter enforcement regime is likely to induce greater compliance – the key variable here is the probability of detection.
Alex Cobham (2005) considers the effects of tax avoidance and evasion on the financing of development. He argues that although funding for new aid commitments is important, sustainable development requires developing states to approach fiscal independence, and that the annual revenue cost of tax leakages is well in excess of aid flows. Firstly, he surveys the structure of tax systems in rich and poor regions of the world and developments during the last three decades; then he sets out a simple model of all leakages, and uses existing work and new data to generate the first comprehensive estimate of the cost to developing countries in revenues foregone.
Joel Slemrod (2007) reviews what is known about the magnitude, nature, and determinants of tax evasion, with an emphasis on the U.S. income tax. Alm (1999), Andreoni, Erard, and Feinstein (1998), and Slemrod and Yitzhaki (2002) offer more comprehensive recent reviews of the literature. Slemrod then places this information into a conceptual and policy context. In conclusion, Slemrod found that the stark differences in compliance rates across taxable items that line up closely with detection rates suggest strongly that deterrence is a powerful factor in evasion decisions. The overall net noncompliance rate for all U.S. federal taxes and the individual income tax seems to stand at about 14 percent. No other country has as much information on tax evasion as does the United States. This makes it difficult to compare information from the U.S with other countries.
Channels of lost revenues
Luigi Alberto Franzoni (1999) uses empirical evidence to support his paper. E. Kirchler, B. Maciejovsky, F. Schneider, (2001) used Overall, 252 fiscal officers, business students, business lawyers, and entrepreneurs produced spontaneous associations to a scenario either describing tax avoidance, tax evasion, or tax flight, and evaluated them as positive, neutral or negative.
James Alm (2012) focused on three specific questions. First, how do we measure the extent of evasion? Second, how can we explain these patterns of behaviour? Third, how can we use these insights to control evasion?
End of Second Series.
*Please read the third article in this series to explore my findings: