Skip to main content

Advertisement

SpringerLink
Log in

Tax structure and corruption: cross-country evidence

  • Published:
Public Choice Aims and scope Submit manuscript

Abstract

One common feature of the current literature on corruption, especially the empirical contributions to it, is the emphasis on the exogenous determinants of corruption, which are generally beyond the direct control of governments. To date, little is known about how the design of government policy potentially affects the level of corruption in a country, even though there is growing recognition that the design and administration of tax and spending policies play important roles in promoting or discouraging corrupt practices. Using a large sample of countries over the 1995–2009 period, this paper fills the gap by conducting the first analysis in the literature to examine the significance of the tax structure, as measured by both tax mix and tax complexity, in determining corruption. Our results suggest the following: (1) countries relying more heavily on direct taxes tend to exhibit less corruption than countries that rely more heavily on indirect taxes, and (2) countries with more complex tax systems tend to be more corrupt than countries with less complex tax systems. These results are robust across alternative measures of corruption and tax structure and alternative estimations with and without correcting the potential endogeneity issue of the tax structure variables.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. See Seldadyo and de Haan (2006) and Gunardi (2008) for a detailed review of the general determinants of corruption.

  2. Studies in the reverse direction in investigating the impacts of corruption on taxation are somehow attracting more attention in the current literature. See, for example, Barreto and Alm (2003), Thornton (2008), Pani (2011) and Alon and Hageman (2013).

  3. The income elasticity of the tax system is generally believed to be another main element in the tax system that gives rise to fiscal illusion. The perceptual bias originated from this source is due to the inability of taxpayers to distinguish between increases in taxes derived from a general growth in income and those associated with higher income tax rates. Therefore, countries with high income elasticity tax systems generally accelerate the political approval of the sustainability of more expenditures (Buchanan 1967; Craig and Heins 1980; Baker 1983). The main problem surrounding past empirical studies of the income elasticity hypothesis is that researchers are frustrated by the lack of a suitable measure of income elasticity (Dollery and Worthington 1996). This is true especially for cross-country studies, and for this reason, we do not explore this point further in this paper.

  4. Beyond the channel of fiscal illusion, there are other ways through which tax structure may influence corruption. For example, the more complex the tax system, the less transparent the tax system will be, which provides more discretion for officials and creates more opportunities for corruption.

  5. For a more detailed discussion, see Sect. 3.3. It should be noted that in order to test the robustness of our results, we also employ alternative measures for both tax mix and tax complexity in the regressions, which are also discussed in Sect. 3.3.

  6. In the Freedom House index, both “political rights” and “civil liberties” are originally scaled from 1 (most free) to 7 (least free).

  7. It should be noted that the evidence on the relevance of these additional variables is, in general, mixed in the empirical literature.

  8. A value of 1 is assigned if two countries share the same border and 0 otherwise.

  9. As we will discuss more carefully in Sect. 3.3, the data for our measure of tax complexity are available only from 2006 onward, so the instruments for this variable are the weighted average of tax complexity from neighboring countries as of 2006.

  10. It should be noted that we also tried the mean of the weighted average tax structure in the neighboring countries for the observed period as an alternative method to calculate instruments. The regression results are very close to what we present below in Sect. 4.

  11. 1995 is the earliest year that our principal corruption index measure is calculated.

  12. The first World Bank Doing Business report, published in 2003, covered 133 economies.

  13. Details are available at http://www.doingbusiness.org/about-us.

  14. The data for top statutory personal income tax rates are available only up to 2005, so our working sample is from 1995 to 2005 when this variable enters the specifications.

  15. The 2SLS estimation is deemed a more suitable approach for its correction for the potential endogeneity problem.

References

  • Alesina, A., & Angeletos, G.-M. (2005). Corruption, inequality, and fairness. Journal of Monetary Economics, 52(7), 1227–1244.

    Article  Google Scholar 

  • Alesina, A., & Wacziarg, R. (1998). Openness, country size and government. Journal of Public Economics, 69(3), 305–321.

    Article  Google Scholar 

  • Ali, A. M., & Isse, H. S. (2003). Determinants of economic corruption: A cross-country comparison. Cato Journal, 22(3), 449–466.

    Google Scholar 

  • Alon, A., & Hageman, A. (2013). The impact of corruption on firm tax compliance in transition economies: Whom do you trust? Journal of Business Ethics , 116(3), 479–494.

  • Andersen, T. B., Bentzen, J., Dalgaard, C.-J., & Selaya, P. (2011). Does the Internet reduce corruption? Evidence from U.S. states and across countries. World Bank Economic Review, 25(3), 387–417.

    Article  Google Scholar 

  • Baker, S. H. (1983). The determinants of median voter tax liability: An empirical test of the fiscal illusion hypothesis. Public Finance Review, 11(1), 95–108.

    Article  Google Scholar 

  • Barro, R., & Lee, J. (2010). A new data set of educational attainment in the world, 1950–2010. Journal of Development Economics, 104, 184–198.

  • Barreto, R. A., & Alm, J. (2003). Corruption, optimal taxation, and growth. Public Finance Review, 31(3), 207–240.

    Article  Google Scholar 

  • Braun, M., & Di Tella, R. (2004). Inflation, inflation variability, and corruption. Economics and Politics, 16(1), 77–100.

    Article  Google Scholar 

  • Broadman, H. G., & Recanatini, F. (2001). Seeds of corruption: Do market institutions matter? MOST: Economic Policy in Transitional Economies, 11(4), 359–392.

    Google Scholar 

  • Brunetti, A., & Weder, B. (2003). A free press is bad news for corruption. Journal of Public Economics, 87(7–8), 1801–1824.

    Article  Google Scholar 

  • Buchanan, J. M. (1967). Public finance in democratic process. Chapel Hill, NC: University of North Carolina Press.

    Google Scholar 

  • Buchanan, J. M., & Wagner, R. E. (1978). Dialogues concerning fiscal religion. Journal of Monetary Economics, 4(3), 627–636.

    Article  Google Scholar 

  • Chand, S. K., & Moene, K. O. (1999). Controlling fiscal corruption. World Development, 27(7), 1129–1140.

    Article  Google Scholar 

  • Chang, E. C., & Golden, M. A. (2007). Electoral systems, district magnitude and corruption. British Journal of Political Science, 37, 115–137.

    Article  Google Scholar 

  • Craig, E., & Heins, A. (1980). The effect of tax elasticity on government spending. Public Choice, 35(3), 267–275.

    Article  Google Scholar 

  • Damania, R., Fredriksson, P., & Mani, M. (2004). The persistence of corruption and regulatory compliance failures: Theory and evidence. Public Choice, 121(3), 363–390.

    Article  Google Scholar 

  • Dollery, B. E., & Worthington, A. C. (1996). The empirical analysis of fiscal illusion. Journal of Economic Surveys, 10(3), 261–297.

    Article  Google Scholar 

  • Dollery, B., & Worthingtong, A. (1999). Fiscal illusion at the local level: An empirical test using Australian municipal data. Economic Record, 75(1), 37–48.

    Article  Google Scholar 

  • Downs, A. (1957). An economic theory of political action in a democracy. Journal of Political Economy, 65, 135.

    Article  Google Scholar 

  • Escaleras, M., Lin, S., & Register, C. (2010). Freedom of information acts and public sector corruption. Public Choice, 145(3), 435–460.

    Article  Google Scholar 

  • Fisman, R., & Gatti, R. (2002). Decentralization and corruption: Evidence across countries. Journal of Public Economics, 83(3), 325–345.

    Article  Google Scholar 

  • Goel, R. K., & Nelson, M. A. (1998). Corruption and government size: A disaggregated analysis. Public Choice, 97(1/2), 107–120.

    Article  Google Scholar 

  • Goel, R., & Nelson, M. (2011). Government fragmentation versus fiscal decentralization and corruption. Public Choice, 148(3), 471–490.

    Article  Google Scholar 

  • Goel, R. K., Nelson, M. A., & Naretta, M. A. (2012). The Internet as an indicator of corruption awareness. European Journal of Political Economy, 28(1), 64–75.

    Article  Google Scholar 

  • Gunardi, H. S. (2008). Corruption and governance around the world: An empirical investigation. Enschede: PPI Publishers.

    Google Scholar 

  • Gurgur, T., & Shah, A. (2008). Localization and corruption: Panacea or pandora’s box? CEMA Working Papers 581. China Economics and Management Academy, Central University of Finance and Economics.

  • Heyndels, B., & Smolders, C. (1995). Tax complexity and fiscal illusion. Public Choice, 85(1–2), 127–141.

    Article  Google Scholar 

  • Knack, S., & Azfar, O. (2003). Trade intensity, country size and corruption. Economics of Governance, 4(1), 1–18.

    Article  Google Scholar 

  • Kotera, G., Okada, K., & Samreth, S. (2012). Government size, democracy, and corruption: An empirical investigation. Economic Modelling, 29(6), 2340–2348.

    Article  Google Scholar 

  • Kunicová, J., & Rose-Ackerman, S. (2005). Electoral rules and constitutional structures as constraints on corruption. British Journal of Political Science, 35, 573–606.

    Article  Google Scholar 

  • La Porta, R., Lopez-de Silanes, F., Shleifer, A., & Vishny, R. (1999). The quality of government. Journal of Law, Economics, and Organization, 15(1), 222–279.

    Article  Google Scholar 

  • Lederman, D., Loayza, N. V., & Soares, R. R. (2005). Accountability and corruption: Political institutions matter. Economics and Politics, 17(1), 1–35.

    Article  Google Scholar 

  • Lee, Y., & Gordon, R. H. (2005). Tax structure and economic growth. Journal of Public Economics, 89(5–6), 1027–1043.

    Article  Google Scholar 

  • Mauro, P. (1995). Corruption and growth. The Quarterly Journal of Economics, 110(3), 681–712.

    Article  Google Scholar 

  • Mill, J. S. (1848). Principles of political economy. Oxford: Oxford University Press.

    Google Scholar 

  • Misiolek, W., & Elder, H. (1988). Tax structure and the size of government: An empirical analysis of the fiscal illusion and fiscal stress arguments. Public Choice, 57(3), 233–245.

    Article  Google Scholar 

  • Paldam, M. (2002). The cross-country pattern of corruption: Economics, culture and the seesaw dynamics. European Journal of Political Economy, 18(2), 215–240.

    Article  Google Scholar 

  • Pani, M. (2011). Hold your nose and vote: Corruption and public decisions in a representative democracy. Public Choice, 148(1), 163–196.

    Article  Google Scholar 

  • Pommerehne, W. W., & Schneider, F. (1978). Fiscal illusion, political institutions, and local public spending. Kyklos, 31(3), 381–408.

    Article  Google Scholar 

  • Seldadyo, H., & de Haan, J. (2006). The determinants of corruption literature: Survey and new evidence. In The 2006 EPCS Conference, Turku, Finland (pp. 20–23).

  • Swamy, A., Knack, S., Lee, Y., & Azfar, O. (2001). Gender and corruption. Journal of Development Economics, 64(1), 25–55.

    Article  Google Scholar 

  • Tavares, J. (2003). Does foreign aid corrupt? Economics Letters, 79(1), 99–106.

    Article  Google Scholar 

  • Thornton, J. (2008). Corruption and the composition of tax revenue in Middle East and African economies. South African Journal of Economics, 76(2), 316–320.

    Article  Google Scholar 

  • Treisman, D. (2000). The causes of corruption: A cross-national study. Journal of Public Economics, 76(3), 399–457.

    Article  Google Scholar 

  • Wagner, R. (1976). Revenue structure, fiscal illusion, and budgetary choice. Public Choice, 25(1), 45–61.

    Article  Google Scholar 

Download references

Acknowledgments

This paper is supported by Program for New Century Excellent Talents in University (NCET-13-0573) of the Ministry of Education of China. We would like to thank Violeta Vulovic for sharing some of the tax variables data used in this paper. Special thanks to two anonymous referees and the Editor for very helpful comments and suggestions that substantially helped improve the paper.

Author information

Authors and Affiliations

  1. School of Finance, Renmin University of China, No. 59 Zhongguancun Street, Haidian District, Beijing, 100872, China

    Yongzheng Liu

  2. School of Economics, Jinan University, No. 601, Huangpu Avenue West, Tianhe District, Guangzhou, 510632, China

    Haibo Feng

Authors
  1. Yongzheng Liu
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Haibo Feng
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Yongzheng Liu.

Appendix

Appendix

See Table 7.

Table 7 Description of variables and sources
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Liu, Y., Feng, H. Tax structure and corruption: cross-country evidence. Public Choice 162, 57–78 (2015). https://doi.org/10.1007/s11127-014-0194-y

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11127-014-0194-y

Keywords

JEL Classifications

Search

Navigation