Effect of tax evasion on economic growth in the East African Community

Abstract

This study examined the effect of tax evasion on economic growth in the East African Community for the period 2001 to 2017. The study adopted the theoretical framework advanced by Bekoe (2013) to examine the effect of tax evasion on economic growth. An interaction effect between the tax evasion variable and the public sector investment variable was incorporated into the econometric model. Annual secondary data from the World Bank Database for World Development Indicators, Medina & Schneider (2018) and African Statistical Yearbooks were used. The Feasible Generalised Least Squares estimation approach was used in the study to account for the presence of heteroscedasticity and auto-correlation. There was a positive relationship between tax evasion and economic growth in the East African Community. However, after interacting the tax evasion and public sector investment variables, there was a negative relationship between tax evasion and economic growth through a reduction in public sector investment. In order to reduce tax evasion and encourage economic growth through an increase in public sector investments, the Governments should broaden the tax base, fight corruption, increase awareness among tax payers and reduce the cost of complying with the law.