Tax evasion and the demand for currency in developing countries: A panel study of African countries

The purpose of this dissertation is to empirically analyze the relationship between tax rates and tax evasion and to measure the magnitude of tax evasion in several African countries. I build a taxpayer behavioral model based on income tax evasion by combining the utility maximization approach initiated by Allingham and Sandmo in 1972 and the currency-equation approach initiated by Tanzi in 1980. The size of the underground economy is used as proxy for tax evasion.The model results in a currency-equation that is estimated using data from a panel of eight African countries (Zaire, Botswana, Malawi, Kenya, Zambia, Zimbabwe, Senegal and Nigeria). The study covers the period 1979-1990. The estimated currency-equation is, then, used to test the effect of changes in tax rates on tax evasion and to measure the size of the underground economy and the magnitude of income tax evasion for each of the eight countries.The results of this study show that tax rate has a conflicting effect on tax evasion depending on how the tax variable is measured. When the top bracket statutory tax rate is used as the tax variable, tax rate has a positive effect on tax evasion. However, when the effective income and total tax rates are used as tax variables, tax rate has a negative effect on tax evasion. This study also shows that, due to socio-cultural factors, taxpayers in former British colonies evade less taxes than taxpayers in former Non-British colonies.The measured size of the underground economy as percent of GNP is about 17.5 percent in Zaire, 2.4 percent in Malawi, 1.5 percent in Botswana, 9.4 percent in Zambia, 3.5 percent in Kenya, 3.2 percent in Zimbabwe, 10.2 percent in Senegal, and 8.3 percent in Nigeria. While, the measured magnitude of income tax evasion as percent of GNP is about 0.7 percent in Zaire, 0.2 percent in Malawi and Kenya, 0.3 percent in Botswana and Zambia, 0.4 percent in Zimbabwe and Nigeria, and 0.5 percent in Senegal.This study's outcomes can be used in the sampled countries for the improvement of the managing of the economy, of the measurement of macroeconomic variables, and in the prescription of economic policy.U of I OnlyETDs are only available to UIUC Users without author permissio