This research paper examined tax evasion and avoidance by small and medium scale enterprises   (SMEs) and it’s effect on Bayelsa state's economy. The survey research design was adopted and data for the study collected from a sample 20 employees of Bayelsa State Board of Internal Revenue through the issue of 20 questionnaire. The multiple regression analysis was adopted as the method of data analysis. Result of the data analyses revealed that there is negative relationship between tax evasion and the economy of Bayelsa state. However, the relationship between the variables was not statistically significant implying that the effect of tax evasion on the economy cannot entirely account for the poor economic performance of the state. The result also showed that there is a significant negative relationship between tax avoidance and the economy. The research concluded that there is overwhelming evidence that tax evasion and avoidance by small and medium scale enterprises are detrimental to Bayelsa state economy. This is because tax evasion and avoidance reduce the quantum of funds available to the state to meet with its economic and financial obligations to the citizens of the state. However, the extent of the effect of tax evasion on the state's economy is quite minimal. On the other hand, the state appears to loss more revenue through tax avoidance than by tax evasion. It is thus recommended that Bayelsa state should find a lasting solution to the menace of tax evasion and tax avoidance. It is proposed that the state should adopt the 'carrot and stick' approach to solve the problem. This should take the form of offering incentives to prospective tax payers as well as stiff punishment to defaulters. Finally, proper utilization of tax revenue will also improve /boost tax compliance level in the state.

Keywords: Taxation, Tax Avoidance, Tax Evasion, Internally Generated Revenues, Economy