Corruption, Optimal Taxation and Growth
AbstractHow does the presence of corruption affect the optimal mix between consumption and income taxation? In this paper we examine this issue using a simple neoclassical growth model, with a self-seeking and corrupt public sector. We find that the optimal tax mix in a corrupt economy is one that relies more heavily upon consumption taxes than on income taxes, relative to an economy without corruption. Our model also allows us to investigate the effect of corruption on the optimal size of government, and our results indicate that the optimal size of government balances the wishes of the corrupt public sector for a larger government, and so greater opportunities for corruption, with those in the private sector who prefer a smaller government. Not surprisingly, the optimal size of government is smaller in an economy with corruption than in one without corruption.
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Bibliographic InfoPaper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2001-03.
Length: 26 pages
Date of creation: 2001
Date of revision:
endogenous growth; corruption; taxation;
Other versions of this item:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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