The Effect of Financial Developmenton Tax Evasion in Iran

Tax evasion constitutes a major component of underground activities and development of financial sector -as one of the most important sectors in every country can affect its size. Considering the importance of this issue, this study tries to investigate the relationship between financial development and tax evasion and provide an answer to this question: can financial development in Iran reduce tax evasion? This study estimates the volume of tax evasion in Iran by using multiple-indicators -multiple causes (MIMIC) model and maximum likelihood method in AMOS software, for the period of 1978-2016. Then the effect of financial development on tax evasion is investigated by using ARDL Bounds test method. The results show that despite some fluctuations, volume of tax evasion has been generally increasing over the underlying period. The results of the estimation of the effect of financial development on the tax evasion indicate that financial development in Iran in long-run and short-run (with one lag) has a negative and significant impact on the tax evasion. Also, findings show that an increase in inflation, increases tax evasion and increase in GDP reduces tax evasion.