Tax Evasion: The Developing Country Perspective

The paper analyzes the concepts of tax evasion and tax avoidance, and their interaction with the underground economy from the perspective of policy reforms aimed at curbing these activities. It describes how the structure of the economy and that of the tax system influence the nature and scope of evasion and avoidance activities. Analytical modelling of tax evasion point out the significant role of the penalty structure and the detection technology in reducing evasion. More elaborate treatments reveal that the audit strategy may yield better results if they are targeted on the source of income and on the tax instrument in question. Measures such as the devolution of fiscal authority, augmenting the role of presumptive taxation, enforcement of the civil and penal provisions of the tax statutes, as well as further reform of the tax base and its structure would each occupy a central role in the attempt to rein in the evasion-avoidance practices.