The Gist of Tax Evasion

Following the long period during which Greece was constantly in the news, tax evasion became a common topic of discussion among economists as it was used to explain Greece's current fiscal problem. Apart from being Greece's problem, tax evasion is a common problem plaguing developing countries around the world. The most prominent cases of tax evasion on the African continent for instance are cases of multinationals that find scrupulous ways to remove funds from the continent without paying the taxes due on them. However, this discussion specifically concerns tax evasion by nationals. The resultant effect of tax evasion in general is that where tax is meant to be a major source of income, we find some developing countries having to depend a lot more on funds from exports and from the sale of government bonds. To put things in perspective, tax as a percentage of GDP for South Africa, Botswana, Nigeria, China, India and Brazil are approximately 25.67%, 25.6%,  3.3%, 10%, 10.5% and 14% respectively with Nigeria being the lowest among it's economic peers. Nigeria's unusually low dependence on tax revenue can be attributed to its over-dependence on oil income. Data has shown that tax evasion is high in Brazil and China as they are among the top 10 countries with the highest (recorded) tax loss.

A society with laws and no proper enforcement sends the message that adhering to the law is optional. In countries where tax enforcement agencies are lax and are not properly equipped, people will underreport their income or use other tax evasion techniques for the simple reason that they can. Unsurprisingly, in countries where there are no social welfare programs and infrastructure to account for how tax previously remitted to the government has been spent, people will tend to refrain from paying taxes.

It is not far fetched to believe that some governments are intentionally lenient with tax evaders or do not pay attention to tax evasion because it suits their purpose and intention. The citizens of a country where majority do not pay taxes will be less inclined to scrutinize government's spending. So it goes that if there are other sources of income that do not directly come from the people, a dishonest government will much rather focus on that. When the populace feel personal ownership for the nation's wealth, one can expect a revolution.

Efficient tax collection and tax law enforcement will benefit a country in so many ways, and it will not be at all surprising to find a relationship between growth in the efficiency of tax systems and economic growth. This is for the simple reason that when the poor man- no matter how uneducated- is forced to pay taxes regardless of how little, he will demand accountability because he feels the pain of letting go of his money. He will feel entitled to walk up to the appropriate government establishment to demand that the road leading up to his house be tarred, and that he get unemployment benefits if need be. With the accountability that will be demanded by the populace will come transparency of government actions. When it becomes difficult to steal public money without raising eyebrows and getting shouted down, there will economic growth as public funds will be used as intended. Schools will be built, infrastructure will be erected and refurbished, electricity will be constant. Efficient tax collection will be soon followed by development.