U4 Anti-Corruption Resource Centre

This Anti-Corruption Helpdesk brief was produced in response to a query from a U4 Partner Agency. The U4 Helpdesk is operated by Transparency International in collaboration with the U4 Anti-Corruption Resource Centre based at the Chr. Michelsen Institute.

Query

Has any work been done that suggests a correlation between the level of tax revenue gathered (as a % of GDP) and levels of corruption in country? Both are means of extracting money from the economy - one formal, one informal. Is it the case, for example, that the economy can only bear so much extraction and that therefore if corruption levels rise, tax revenue falls (or vice versa)?

Purpose

To find out if existing empirical research establishes a negative correlation between levels of corruption in an economy and tax revenue collected.

Content

1. Effects of Corruption on Tax Revenue
2. Effects of Taxation on Corruption
3. Further Reading

Summary

A review of literature indicates that corruption has a significant negative impact on the levels of tax revenue collected in a country. The current understanding of the correlation between corruption and tax revenue however is incomplete since there is insufficient information available on the impact of taxation on corruption.

Corruption not only lowers the tax-GDP ratio but also causes long-term damage to the economy by detracting investment, increasing the size of the informal economy, distorting tax structures and corroding the tax morality of taxpayers. All of these in turn further reduce the long term revenue generating potential of the economy.

The impact of taxation on corruption is less explored in the existing research literature. The little information that was found indicates that higher tax rates can induce more corruption in an economy by incentivising tax evasion. Some scholars argue that corruption can mitigate the burdens of excessive taxation on the economy through enabling better allocation of resources and enabling investment. However, the underlying assumptions of these findings have been challenged by other researchers. It is recommended that more empirical research is carried out to better understand the impacts of taxation on corruption.

Authors

Farzana Nawaz, Transparency International, fnawaz@transparency.org

Date

12/01/2010

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