Financial development and tax evasion: International evidence from OECD and non-OECD countries

Abstract

This study investigates the nexus between financial development and tax evasion across 156 countries from 2000 to 2017. In contrast to previous research focusing solely on banks or financial markets’ development, we employ a more comprehensive financial development index introduced by the International Monetary Fund (IMF) in 2016. This index gauges the progress of financial institutions (FI) and financial markets (FM) in terms of depth, access, and efficiency. Our findings underscore a negative correlation between financial development and tax evasion. Enhanced depth, access, and efficiency in both FI and FM correspond to reduced levels of tax evasion. Nevertheless, disparities emerge between the Organization of Economic Cooperation and Development (OECD) and non-OECD countries. While non-OECD countries exhibit negative associations between FI and FM development and tax evasion, in OECD countries, the role of FI assumes greater significance in curtailing tax evasion. Notably, within OECD countries, the depth of FI and FM emerges as the sole influential factor. This contrasts starkly with non-OECD counterparts, where all dimensions − depth, access, and efficiency − negatively influence tax evasion. Our research has noteworthy implications for policymakers in both categories of countries.