Tax evasion and financial instability
| Pages | 531-539 |
| DOI | https://doi.org/10.1108/JFC-04-2019-0051 |
| Date | 28 January 2020 |
| Published date | 28 January 2020 |
| Author | Peterson K. Ozili |
| Subject Matter | Financial risk/company failure,Financial crime,Accounting & Finance |
Tax evasion and financial instability
Peterson K. Ozili
Banking Supervision Department, Financial System Stability Directorate,
Central Bank of Nigeria, Lagos, Nigeria
Abstract
Purpose –The purpose of this paper is to explore the association between tax evasion and financial
instability.The discussion also examines theeffects of tax evasion for financial instability.
Design/methodology/approach –This paper is an exploratory study on the effect of tax evasion on
financialinstability
Findings –The paper shows that tax evasion can reduce the tax revenue available to governments to
manage the economy and can weaken the government’s ability to promote stability in financial systems,
whereas onthe contrary, taxpayers who evade taxes feel theycan use the evaded tax money to rather improve
their own financialstability.
Originality/value –This paper presentsthe first attempt to carefully examine the association between tax
evasion and financialinstability.
Keywords Financial crisis, Tax avoidance, Financial crime, Tax evasion, Financial stability,
Government expenditure
Paper type Conceptual paper
1. Introduction
The objective of this article is to explore the relationship between tax evasion and financial
instability. Tax evasion and financial instability are two problems that governments are
concerned about. The public finance literature has not explored the effect, or the
contribution, of tax evasion to financialinstability. Tax evasion and financial instability are
not mutually exclusive because excessive tax evasion can prolong initial disruptions in
financial systems because tax evasion already leaves governments with little resources to
intervene, pressuring themto rely on debt. Tax evasion can also affect government’s ability
to intervene how it see fit to restore the financial/economicsystem. On the other hand, severe
disruptions in financialsystems can provide incentives to evade tax payments.
The association between tax evasion and financial instability can be viewed through
new tax or modified tax expectations. For instance, when governments introduce new
forms of taxation or when they review existing tax systems, they must consider the
existing tax burden and the taxpayers’feeling of being overtaxed, in order not to break
the boundaries of absolute tax limit (Dimitrijevi
c, 2016), which encourages tax evasion.
When the tax burden becomes excessive, whether new or modified, it can reduce the
disposable income of individuals and make them react in ways that could disrupt the free
working of financial systems particularly if over-burdened taxpayers believe the
government is corrupt and do not deserve their hard-earned income. Given these concerns
about the interrelationship between tax evasion and disruptions in finance, an important
question is what will be the effect of tax evasion for stability, or instability, in financial
systems.
The discussion in this article contributes to the public finance literature and contributes
to the debate on the interrelationship between tax evasion and governmentfinancing. Also,
the discussion in this article contributes to the financial stability literature that investigate
Financial
instability
531
Journalof Financial Crime
Vol.27 No. 2, 2020
pp. 531-539
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-04-2019-0051
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