Good governance and tax evasion: mediating effect of socioeconomic conditions

Empirical analyses on the relationships between governance quality and tax evasion that incorporate mediating effects of socioeconomic conditions have yet to be thoroughly examined. Therefore, this is the first empirical study that investigates the mediating role of socioeconomic conditions on the relationships between good governance and tax evasion from the perspective of both developed and developing countries. Using the panel data of 20 developed and 17 developing countries covering the period from 2002 to 2015 revealed a negative relationship between good governance and tax evasion in both classes of countries. This implies that sound governance leads to lower tax evasion in developed and developing countries. The study also demonstrated a negative impact of socioeconomic conditions on tax evasion in developed countries and a positive impact in developing countries. In addition, a significant mediating effect of socioeconomic conditions in developed countries was revealed, while there was no mediating role in emerging countries. These findings imply that socioeconomic conditions help reduce the level of tax evasion with the presence of good governance. The higher the level of good governance and the better the socioeconomic conditions, the lower the tax evasion. In this setting, this study provides valuable insights into the formulation of appropriate guidelines to improve the quality of governance and socioeconomic conditions that, in turn, will help significantly reduce tax evasion.