Sustainability level, corruption and tax evasion: a cross-country analysis
| Pages | 328-348 |
| DOI | https://doi.org/10.1108/JFC-09-2014-0041 |
| Date | 03 May 2016 |
| Published date | 03 May 2016 |
| Author | Hichem Khlif,Achraf Guidara,Khaled Hussainey |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Sustainability level, corruption
and tax evasion:
a cross-country analysis
Hichem Khlif
Faculty of Economics and Management of Mahdia,
University of Monastir, Kerkennah, Tunisia
Achraf Guidara
School of Economic Sciences and Management of Sfax, University of Sfax,
Sfax, Tunisia, and
Khaled Hussainey
Plymouth Business School, Plymouth University, Plymouth, UK
Abstract
Purpose – This paper aims to examine the relationship between the level of sustainability and tax
evasion and test whether the level of corruption moderates such a relationship.
Design/methodology/approach – The sample consists of 65 developed and developing countries.
Tax evasion is measured using a macro indirect approach used by Schneider et al. (2010). The
sustainability level and corruption variables are collected from The Global Competitiveness Report for
2012-2013.
Findings – This study nds that the level of tax evasion is negatively associated with the level of
sustainability (overall score and social and environmental score) and the quality of infrastructure. When
we distinguish between low- and high-corruption countries, we nd that this negative association is
signicant for low-corruption countries and insignicant for high-corruption countries. These results
imply that the level of corruption may reduce the tendency of individuals in a given state to accept and
trust their government in general and comply with the tax rules in particular.
Originality/value – Our empirical ndings have policy implications for governments with high
levels of tax evasion, as they highlight the importance of states’ engagements towards their citizens in
reducing tax evasion.
Keywords Corruption, Sustainability, Tax evasion, Quality of infrastructure
Paper type Research paper
1. Introduction
Although audits and scal authorities’ controls exist, tax evasion[1] represents a
widespread phenomenon in both developed and developing countries. Tax evasion may
considerably affect public revenues because of the lack of tax compliance (Picur and
Riahi-Belkaoui, 2006). Understanding the determinants of tax evasion is crucial for
governments that seek to reduce the level of tax evasion in society (Richardson, 2008).
Given this importance, this topic has gained major interests in tax literature in the
past decade (e.g. Alm and Torgler, 2006;Picur and Riahi-Belkaoui, 2006;Riahi-Belkaoui,
2004;Richardson, 2006;Richardson, 2008;Tsakumis et al., 2007). These studies have
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JFC
23,2
328
Journalof Financial Crime
Vol.23 No. 2, 2016
pp.328-348
©Emerald Group Publishing Limited
1359-0790
DOI 10.1108/JFC-09-2014-0041
considered several variables to explain tax evasion, including demographic, legal and
behavioral characteristics.
A tax system is a social contract that promises citizens that in exchange for
participating in the economy by paying taxes, government will nance the overall state
welfare (Riahi-Belkaoui, 2004). Riahi-Belkaoui (2004) suggested that future research
may expand the determinants to include social and environmental norms to contribute
to an efcient public policy. Our empirical investigation is further motivated by the
recent literature review conducted by Khlif and Achek (2015). It summarizes
cross-country empirical studies dealing with the determinants of tax evasion. In their
review, they explicitly call for an empirical investigation of the effect of a country’s level
of social and environmental sustainability on tax evasion, as tax compliance is a type of
social contract between a government and its citizens. However, there is no study, to
date, that examines the effect of a country’s sustainability level on tax evasion. Our
paper replies to these research calls and lls an important research gap in the literature
by being the rst to examine the impact of the sustainability level on tax evasion. We
also examine whether the level of corruption affects the sustainability-tax evasion
relationship.
We used a sample of 65 developed and developing countries and found that the level
of tax evasion is negatively associated with the level of sustainability (overall score and
social and environmental score) and the quality of infrastructure. When we distinguish
between low- and high-corruption countries, we found that this negative association is
signicant for low-corruption countries and insignicant for high-corruption countries.
These results imply that the level of corruption may reduce the tendency of individuals
in a given state to accept and trust their government in general and comply with the tax
rules in particular (Slemrod, 2002;Slemrod and Katuscak, 2002). In addition, a high
corrupt environment may increase the feeling among citizens that they do not owe
anything to the government, because it does not respect the terms of social contract
established between them. Our empirical ndings have policy implications for
governments having high levels of tax evasion, as they highlight the importance of
state’s engagement toward its citizens for reducing tax noncompliance.
We offer two major contributions to tax literature. First, the paper is the rst to
examine the impact of different sustainability scores on tax evasion. Second, we are also
the rst to examine the extent to which the corruption level may affect the association
between sustainability and tax evasion. These ndings have policy implications for
governments that seek to reduce the level of tax evasion.
The remainder of the paper is organized as follows. Section 2 describes the
development of a theoretical basis for the association between sustainability and tax
evasion and formulates research hypotheses. Section 3 describes the research design.
Section 4 summarizes and analyzes the empirical results of this study. Section 5 presents
the conclusions, limitations and future research avenues.
2. Hypotheses development
2.1 Sustainability level and tax evasion
A tax system in a country is considered a social contract between taxpayers and their
state. Riahi-Belkaoui (2004, p. 137) dene the tax system as:
[…] is a special social contract whereby individuals in a given state accept and trust their
government in general, and comply with the tax burden in particular, if the government and/or
329
Sustainability
level,
corruption and
tax evasion
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