Does inclusive financial development matter for firms' tax evasion? Evidence from developing countries

- Developing countries lose around US$100 billion annual revenues due to tax evasion.
- Examine the effect of inclusive financial development on firms' tax evasion.
- We find firms in more inclusive financial sector evade taxes to a lesser extent.
- This effect is pronounced for the countries with stronger legal rights; and
- With a smaller share of the informal economy.

We find that firms in developing countries with more inclusive financial sector evade taxes to a lesser extent. This effect is stronger for the countries with stronger legal rights and a smaller share of the informal economy. The results suggest that the growing public policy emphasis on achieving inclusive financial development may also help reduce tax evasion in developing countries.