We provide some empirical evidence of how a poor business environment may incentivise tax evasion. In particular, we examine the roles that specific components of the business environment that include: bribery, efficiency of the legal systems, and the provision of public capital such as adequate provision of electricity, play in determining tax evasion. We exploit industry-location averages for bribes as instruments to deal with the endogeneity concerns. We use IV Tobit estimation procedures and find that the extent of tax evasion is associated with the quality and efficiency of the legal systems, bureaucratic bribery and the inadequate provision of public capital. In addition we find that the business environment as shaped by the various constraints has implications for tax evasion. These results suggest that ameliorating the business environment by reigning in on corruption, strengthening the legal system, as well adequate provision of public capital can encourage tax compliance behaviour among firms.

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