Impact of Tax Evasion and Avoidance on the Economy

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Impact of Tax Evasion and Avoidance on the Economy


The primary source of government revenue to fulfill its obligations is taxation. Tax evasion leads to economic instability. Therefore, extra tax revenues are necessary to creating a better financial condition. Every individual is obligated to pay taxes (Cobham, 2005) responsibly. Tax avoidance refers to the legal act by the taxpayer to pay the least amount of possible tax while; tax evasion is the practice of using illegal means to avoid meeting one’s tax obligations (Fisman & Wei, 2004). The aim of this proposal is to examine the effects of tax evasion and avoidance on economic stability.


Most governments finance their recurring and capital expenditures using revenues collected through taxation. Tax matters cannot be avoided holding to this fact. The importance of studying this topic gets manifested by the fact that all governments rely on individual taxes to fund their activities. Currently, people are adamant about paying taxes including even the learned guys who have to be forced to pay taxes (Alm & Martinez, 2001). Undertaking this study helps us know how and why people and business structures avoid or reduce their tax due to them when they know this is an illegal act. Reasons behind cases of individual organizations continually getting prosecuted for committing tax offenses are very few, and the government still don’t have enough revenue collected through taxation.

The primary concern of this research is to analyze the relationship between tax income and tax evasion with economic stability. With the increase in tax revenues, better public goods and services are offered.The other reason for undertaking this study so as to establish the causes of tax evasion and avoidance (Alm & Martinez, 2001). These reasons may include corruption in both public and private offices, inadequate tax education and awareness, ignorance of the tax authority, insufficient enforcement for default, the proliferation of taxes, loopholes in tax laws and regulations, high levels of illiteracy and high tax rates set by tax authorities (Slemrod & Yitzhaki, 2002). The impacts are adverse to economies as many nations lack funds for development purposes.

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