Tax Evasion and Its Impact on Government Revenue: Causes, Challenges, and Solutions

Abstract

Tax evasion remains one of the most significant challenges affecting government revenue collection and economic development across both developed and developing countries. It refers to the illegal practice of deliberately avoiding tax obligations through underreporting income, overstating deductions, concealing assets, or engaging in fraudulent financial activities. The reduction in tax revenue caused by tax evasion limits governments' ability to finance essential public services such as education, healthcare, infrastructure, and social welfare programs, thereby weakening sustainable economic growth and increasing fiscal deficits. Various factors contribute to tax evasion, including high tax rates, weak tax administration, corruption, low taxpayer awareness, complex tax regulations, and inadequate enforcement mechanisms. The rapid advancement of globalization and digital financial systems has further complicated tax compliance by enabling cross-border financial transactions that are difficult to monitor. This study examines the major causes of tax evasion, evaluates its impact on government revenue and economic stability, identifies the challenges faced by tax authorities in combating tax evasion, and discusses practical solutions that can improve tax compliance. The study relies on secondary data obtained from academic literature, government reports, and publications of international organizations. The findings suggest that strengthening tax administration, simplifying tax policies, adopting digital tax systems, enhancing transparency, promoting taxpayer education, and fostering international cooperation can substantially reduce tax evasion and improve government revenue collection. Effective implementation of these measures contributes to sustainable public finance, economic stability, and equitable development.