THE EFFECT OF TAX EVASION ON GOVERNMENT REVENUE

Introduction
The purpose of this paper is to examine the effect of tax evasion on
government revenue. The coming few pages will explain the definition of tax,
tax evasion, causes of tax evasion, types of tax evasion, government
revenue and finally the effect of tax evasion on government revenue. This is
written in bases of academic purpose and both primary and secondary data
is used; we have used any available books and websites.

TAX:
A fee charged ("levied") by a government on a product, income, or activity. If
tax is levied directly on personal or corporate income, then it is a direct tax.
If tax is levied on the price of a good or service, then it is called an indirect
tax. The purpose of taxation is to finance government expenditure. One of
the most important uses of taxes is to finance public goods and services,
such as street lighting and street cleaning. Since public goods and services
do not allow a non-payer to be excluded, or allow exclusion by a consumer,
there cannot be a market in the good or service, and so they need to be
provided by the government or a quasi-government agency, which tend to
finance themselves largely through taxes

Tax Evasion:
Tax evasion is an illegal practice where a person, organization or corporation
intentionally avoids paying his/her/its true tax liability. Those caught
evading taxes are generally subject to criminal charges and substantial
penalties.

Causes of tax evasion:

a) Weak tax system: if there is no strong tax system in the country,
taxes can easily be evaded,

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THE EFFECT OF TAX EVASION ON GOVERNMENT REVENUE

b) Poor data base management: if government has no exact number
of tax payers in the country such as individuals, organization etc, then
tax evasion is high,

c) VAT: this is a type of tax paid by purchasers and it is the most common
type of indirect tax, the sellers can easily make evasion if there is no
data base management.
d) Tax collectors: the individual tax collectors can make tax evasion by
making poor records, and using tax for personal use.

Types of tax evasion:

Here are some common types of tax evasion;
a) Corporate tax evasion
b) Employment tax evasion
c) Money laundering tax evasion
d) Abusive tax shelters
e) VAT tax evasion
f) Property tax evasion
The above components are the types of tax evasion, but there are also some
other indicators of tax evasion these include:
a) Claiming false deductions
b) Hiding or transferring assets and income

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THE EFFECT OF TAX EVASION ON GOVERNMENT REVENUE

c) Overstating the amount of deductions
d) Making false entries in the record
e) Failing to report income earned in a stock exchange
f) Maintaining two sets of books

g) Abusing charitable deductions

Methods to combat tax evasion
1 The rapid introduction of multilateral automatic tax information exchange between tax
agencies in every single jurisdiction. This would ensure money illegally held offshore was
easily identified and accounted for.
2

The introduction of new levels of financial transparency requiring the public disclosure of
the ultimate human beneficiaries of companies, trusts and foundations.

This is needed to prevent the further subversion of countries' tax bases whether by high net
worth individuals, businesses, corrupt politicians, criminals or terrorists. It is also required to
restore faith in the rule of law and the democratic process as the current non-disclosure of
beneficial ownership is corruption's best friend.
3

The global introduction of country-by-country reporting so that every company has to

publicly state financial details relating to its turnover, profits, costs, employees and taxes in
every jurisdiction it operates in where its revenues exceed $5m. It is astounding that in the
21st century, it is impossible for citizens in many resource-rich nations to establish whether
their country has got a fair deal from its oil, gas or minerals.

Concerted international action needs to be taken to ensure the hundreds of billions of

dollars lost to exchequers by companies artificially inflating their costs and deflating profits

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through intra-company transactions known as transfer mispricing is identified, contained
and reduced.
5

good tax system: the reasons for having good tax system is that government will be able to
know if the tax is collected in time and also is collected with the same projected amount.

Data base management: this will enable the government to register the tax payers and their
properties so that if any dont pay his tax liability actions must be taken.

Making checkpoints: this will especially be important for indirect taxes such as VAT, since
it the most vulnerable tax worldwide and particularly in Somaliland this tax is not paid by
citizens except in some places.

Government revenue
Government revenue is money received by a government. It is an important tool of the fiscal
policy of the government and is the opposite factor of government spending. Revenues earned by
the government are received from sources such as taxes levied on the incomes and wealth
accumulation of individuals and corporations and on the goods and services produced, exports
and imports, non-taxable sources such as government-owned corporations' incomes, central bank
revenue and capital receipts in the form of external loans and debts from international financial
institutions.

The effect of tax evasion on government revenue:

Here are some common effects of tax evasion on government revenue:
a) Loss of government revenue,
b) Increases in corruption,
c) Tax evasion causes reduction in countrys economic growth,

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THE EFFECT OF TAX EVASION ON GOVERNMENT REVENUE

d) Increases inflation,
e) Since tax is the highest revenue earned by the government its evasion will cause
expenditures to outweigh revenues,
f) Increase in prices of land and houses.

Conclusion
The above information states that tax evasion is tremendous phenomenon that almost all third
world countries encounter. We explained methods to combat and prevent tax evasion by showing
its affect on government revenue. If tax evasion spreads the country that will cause a huge
decline on governments revenue, and that will encourage tax evaders.

Recommendations
1. We suggest to the government to use the above methods to combat tax evasion,
2. We recommend that actions must be taken to those who evade tax,
3. We suggest government to make a good data base management, so that tax evaders can easily
be identified,
4. Finally we recommend government to establish tax checkpoints so that the tax evaders can be
caught and punished

References
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1. Alm, J., (1991). A perspective on the experimental analysis of taxpayer reporting. The
Accounting Review, 66(3) , 577-593.
2. Alm, J., Jackson, B. R., & Mckee, M. (1993). Fiscal exchange, collective decision
institutions,
and tax compliance. Journal of Economic Behavior and Organization, 22 , 285-303.
3. Cowell, F. (1990). Cheating the government. Cambridge, MA: MIT Press.
4. Cowell, F. A. (1992). Tax evasion and inequity. Journal of Economic Psychology, 13 ,
521-543.
5. Cowell, F., & Gordon, J. (1988). Unwillingness to pay. Journal of public Economics,
36(3), 305-321.
6. Dalton, H. (1954). Principles of Public Finance (4th ed.)
7. Dell'Anno, R. (2009). Tax evasion, tax morale and policy maker's effectiveness. The
Journal of Socio-Economics 38 , 988-997.
8. Elffers, H. (1991). Income tax evasion: theory measurement, Deventer. Kluwer Academic

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