Tax Evasion, Tax Administration, and the Impact of Growth: Tax Enforcement as Regulatory Failure in a High Tax Rates, High Tax Evasion, and Low-Growth Economic Environment

In this chapter, we provide an overview on the interlinked problems of high tax rates, tax evasion, tax havens, global tax competition, the enforcement costs of a tax system, and their relationship with economic growth. Reviewing the related literature, it becomes clear that the current state of high tax evasion and high tax rates are detrimental to both the workings of the tax system and economic growth. There is a clear regulatory failure in attempting to battle tax evasion with either higher tax rates or higher enforcement costs—a conclusion that is supported by empirical data from several OECD countries. In addressing this problem, our review and empirical analysis clearly points toward a solution that is based in providing appropriate motives for taxpayers to pay their taxes while not distorting their plans for economic activity. Optimal allocation of resources in an environment of low economic growth and fiscal restraint can easily be achieved by lowering tax rates—it is then, and only then, that other issues of public policy such as equity and redistribution considerations can be meaningfully discussed.