Tax evasion is a major component of underground activities or the irregular sector of the economy, and economists are increasingly seeking to analyze this phenomenon. Given that the tax structure is highly dependent on the governance structure and improvements in governance and corruption control structures lead to public confidence in the government and can reduce the underground economy and tax evasion, examining the relationship between the quality of institutions and good governance with Tax evasion are also important. This study tries to answer this question by examining this relationship during the period 1978-2018, whether improving the quality of institutions in Iran can reduce tax evasion and the underground economy in the country or not? In order to achieve this goal, after identifying the factors causing tax evasion, in the first stage using the method of Multiple Indicators - Multiple Causes (MIMIC) to estimate the time series of relative and absolute size of tax evasion in Iran and investigate the causes and effects using Amos software and with maximum likelihood method. After comparing the fit criteria and estimated results of the estimated models, a model was selected as the final model and basis for tax evasion calculations in which energy consumption growth, money demand growth and GDP growth as effects and inflation, unemployment rate, export-to-GDP ratio, official exchange rate, per capita income, capital asset acquisition ratio (construction cost) to GDP, and import tax ratio to total imports are considered as causes of tax evasion. This model is in a better position than other estimated models in terms of significance of coefficients of factors and effects of tax evasion. In this model, inflation, tax burden, per capita income and official exchange rate have a positive and significant effect on tax evasion, and economic openness index, government size and unemployment rate have a negative effect on tax evasion. It should be noted that in the selected model, the greatest effect of tax evasion is on the growth of money demand. Also, among the variables of causes, the most impact is related to per capita income.
The results of calculating the relative size of tax evasion show that although the trend of tax evasion fluctuates in the desired period, but in general it has had an increasing trend over a period of 38 years, so that from 6.12% of official GDP in In 1978, it increased to its highest amount in 2000 (24.46% of GDP) and finally in 2016, it reached 11.33%. Also, the results of calculating the absolute size of tax evasion show that its amount increased from 63664 billion rials in 1978 to its highest amount in 2000 (290250 billion rials) and in 2018 equal to 89095 billion rials.
Then, in the second stage, after calculating the time series of the hidden variable of tax evasion, in order to study and empirically analyze the long-term and short-term impact of institutional quality and other related variables (inflation and GDP) on tax evasion in the Iranian economy in Time series, ARDL Bounding test method was used. The results show that institutional quality is negative and significant both in the short and long term and indicates that improving the quality of institutions in Iran during the study period is a factor to prevent further growth of the underground economy and tax evasion. Also, according to the results, the increase in inflation in the long run has led to an increase in tax evasion in the country, and in contrast, the increase in GDP is a factor to prevent further growth of the underground economy and tax evasion.