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Good governance and tax evasion: mediating effect of socioeconomic conditions

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Abstract

Empirical analyses on the relationships between governance quality and tax evasion that incorporate mediating effects of socioeconomic conditions have yet to be thoroughly examined. Therefore, this is the first empirical study that investigates the mediating role of socioeconomic conditions on the relationships between good governance and tax evasion from the perspective of both developed and developing countries. Using the panel data of 20 developed and 17 developing countries covering the period from 2002 to 2015 revealed a negative relationship between good governance and tax evasion in both classes of countries. This implies that sound governance leads to lower tax evasion in developed and developing countries. The study also demonstrated a negative impact of socioeconomic conditions on tax evasion in developed countries and a positive impact in developing countries. In addition, a significant mediating effect of socioeconomic conditions in developed countries was revealed, while there was no mediating role in emerging countries. These findings imply that socioeconomic conditions help reduce the level of tax evasion with the presence of good governance. The higher the level of good governance and the better the socioeconomic conditions, the lower the tax evasion. In this setting, this study provides valuable insights into the formulation of appropriate guidelines to improve the quality of governance and socioeconomic conditions that, in turn, will help significantly reduce tax evasion.

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Availability of data and material

The data are available at World Government Indicators (WGI) and the International Monetary Fund (IMF) and will be sent on request.

Notes

  1. This research is based on the MIMIC Model (Multiple Causes Multiple Indicators), a shadow economy macroeconomic measure. This MIMIC Model takes into account various factors, such as tax burden, regulatory burden, economic freedom index, business freedom index, unemployment rate, and GDP per capita (Medina and Schneider 2018), which directly affect the dimensions of the shadow economy over time.

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Funding

The authors received no funding from any sources.

Author information

Authors and Affiliations

  1. Department of Economics & Banking, International Islamic University Chittagong, Kumira, Sitakunda, Chattogram, 4318, Bangladesh

    Md. Harun Ur Rashid, Noman Uddin & Md. Shariful Haque

  2. Department of Accounting and Information Systems, University of Rajshahi, Rajshahi, 6205, Bangladesh

    Syed Zabid Hossain

Authors
  1. Md. Harun Ur Rashid
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  2. Noman Uddin
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  3. Md. Shariful Haque
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  4. Syed Zabid Hossain
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Contributions

All authors contributed equally.

Corresponding author

Correspondence to Md. Harun Ur Rashid.

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Appendices

Appendix A

List of sample countries

Developed countries

Developing countries

Australia

Japan

Argentina

Libya

Austria

Netherland

Armenia

Mexico

Belgium

New Zealand

Bangladesh

Nepal

Canada

Norway

Bhutan

Pakistan

Denmark

Poland

Brazil

Qatar

Finland

Singapore

Chile

Sri Lanka

France

Spain

China

Ukraine

Germany

Sweden

Egypt

 

Israel

United Kingdom

India

 

Italy

United States of America

Indonesia

 

Appendix B

Measurement of variables and sources of data

Name of Variables

Acronym

Measurement

Data sources

Tax evasion

TE

The size of the shadow economy

https://www.imf.org/~/media/Files/Publications/WP/2018/wp1817.ashx

Good governance

GG

Average of six World Development Indicators (WDI) including control of corruption, voice and accountability, rule of low, regulatory quality, government effectiveness, and political stability

World Government Indicators (WGI) https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators

Socioeconomic conditions

SEC

The score of the Human development index (HDI)

http://hdr.undp.org/en/content/human-development-index-hdi

Unemployment

UNEM

Unemployment is a percentage of the total labor force

Word Bank (2018)

https://data.worldbank.org/

Agriculture

AGRI

The value-added of agriculture as a percentage of GDP

GDP per capita

GDP

GDP per capita as a constant 2010 US$

Inflation

INF

Inflation as a percentage of consumer prices

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Rashid, M.H.U., Uddin, N., Haque, M.S. et al. Good governance and tax evasion: mediating effect of socioeconomic conditions. Asia-Pac J Reg Sci 6, 759–776 (2022). https://doi.org/10.1007/s41685-022-00242-x

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