Electoral democracy, corruption, and tax evasion

A key challenge of developing and emerging economies is establishing effective tax systems, as fiscal capacity is essential for state building and economic growth. This study examines the relationship between electoral democracy, public sector corruption, and tax evasion through trade misinvoicing, using data from 53 developing and emerging economies to explore how political and institutional factors shape tax evasion. The analysis reveals a positive relationship between corruption and tax evasion. Most strikingly, the study findings show an inverted U-shaped relationship between democracy and tax evasion, where tax evasion initially increases with democratization but declines as institutions strengthen. However, these effects are complex, as the levels of democracy and corruption interact to influence the magnitude of their impact. Furthermore, electoral cycles further amplify tax evasion due to the intense competition for political power and the opportunities for illicit activities that arise in the electoral context.