Does Economic Freedom Matter in Tax Evasion? Empirical Evidence from Asian Countries

Abstract

The heterogeneity of Asian governance—stemming from poor administration and tax evasion—affects the business climate, which in turn, causes underinvestment and low tax-to-GDP ratios in the private sector. Due to a dearth of research on tax evasion in Asian countries, this study aims to investigate the relationship between economic freedom and tax evasion. To this end, this study draws upon the socioeconomic theory and applies a variety of econometric methods to analyze data comprising 414 observations from 23 Asian countries between 2001 and 2018. The empirical analysis revealed that the rate of tax evasion is negatively correlated with the level of economic freedom. More specifically, higher government integrity, lower fiscal freedom (tax rate), higher monetary freedom, and investment freedom significantly reduce tax evasion. The findings suggest that Asian governments undertake a robust corporate governance strategy to promote economic freedom and enable stockholders to protect their rights and influence the decision-making process of taxpayers in a bid to reduce tax evasion to a significant level. Moreover, the findings offer valuable insights to governments, tax authorities, and researchers in the formulation of economic policies geared at reducing tax evasion. JEL Classification: H26, O17, A14