Tax structure and corruption: cross-country evidence


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.

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  1. 1.

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

  2. 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. 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. 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. 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. 6.

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

  7. 7.

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

  8. 8.

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

  9. 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. 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. 11.

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

  12. 12.

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

  13. 13.

    Details are available at

  14. 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. 15.

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


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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.

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Correspondence to Yongzheng Liu.



See Table 7.

Table 7 Description of variables and sources

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Liu, Y., Feng, H. Tax structure and corruption: cross-country evidence. Public Choice 162, 57–78 (2015).

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  • Tax structure
  • Direct versus indirect taxes
  • Tax complexity
  • Corruption

JEL Classifications

  • D73
  • H20