Bosnia and Herzegovina (BiH) is still at an early stage in development of functional economic and social environment. “How do tax evasion and tax policy effect on economic and social environment?” This is one of the key issues that requires full attention of fiscal policy and is also the hypothesis of this study. Is tax evasion in direct correlation with the economic welfare of a society, social environment and economic activity? The effort to shed light on these questions can help in the implementation of measures and activities on the prevention and suppression of tax evasion.In the focus of interests of this study are two groups of respondents, the taxpayers on one side who make contacts with professional groups on the other side employed in tax administrations (inspectors). For the purpose of analysing the collected data, the statistical package of SPSS was used. The contribution of this research and the main research result indicate that tax evasion has multiplicative effects, it destroys the reputation of institutions primarily and in particular the reputation of the tax administration, it poses a threat to the tax system and rule of law, causing taxpayer’s distrust of the tax system itself. Thus, by reducing tax evasion the situation in public finances improves substantially. The study shows the theoretical analysis of the phenomenon of tax evasion in BiH (which is not a goal in itself), including analysis of current tax procedures and tax policy of BiH and their influence on economic and social environment.

Tax evasion is more of a disciplinary problem, produced by numerous, big and turbulent changes. The growing problems with tax evasion are present all over the world and they require a global solution of the problem. Although tax evasion is a global phenomenon, this is also the issue that most developed countries in the world are dealing with, there are significant differences between individual countries, all depending on the legal order, the entire social system and it is depending from country to country, and this is especially evident among transitioning countries. The problem of tax evasion is particularly acute in Bosnia and Herzegovina (hereinafter BiH). The main research result indicates that tax evasion has multiplicative effects; by reducing tax evasion, the situation in public finances improves substantially. This article discusses tax evasion in BiH and the perception of taxpayers and tax inspectors towards tax evasion. In this line, this article presents the theoretical analysis of the phenomenon of tax evasion (which is not a goal in itself), including the empirical analysis factors that have the greatest influence on tax evasion by using logistic regression modeling method. The paper checks the main hypothesis by identifying the factors that affect tax evasion and by determining their significance and impact, it is possible to construct logit model for determining factors of tax evasion in BiH.

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