Revisiting the tax evasion and corruption–economic development nexus in Ghana: fresh evidence from a SEM approach

Abstract

PurposeThis study explored the tax evasion and corruption–economic development nexus in Ghana and the moderating role of institutional quality in this relationship.Design/methodology/approachTo achieve this objective, this study employed the structural equation modelling (SEM) strategy and maximum likelihood (ML) estimation method on selected quarterised data from 1996 to 2020.FindingsThe study found that tax evasion has a positive impact on GDP per capita and urbanisation but a negative impact on the Economic Freedom of the World Index (EFWI). The study revealed that corruption has a positive relationship with GDP per capita but relates with EFWI inversely. Finally, the study found that institutional quality moderates the nexus between tax evasion and corruption and economic development.Social implicationsThe findings imply that the quality of state institutions has a significant impact on the government's ability to control tax evasion and corruption in order to drive economic development.Originality/valueOne novelty of the study is the examination of the combined effects of tax evasion and corruption as exogenous variables in a single econometric model. Again, to moderate the multivariate relationships of the study, the principal component analysis (PCA) was used to create an institutional quality index. The study recommends that policymakers implement comprehensive tax evasion and corruption reduction strategies simultaneously in order to increase tax revenues for economic development and SDGs achievement.