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Fiscal policy and corruption

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  • Bernard Gauthier

    ()
    (Institut d'économie appliquée, HEC Montréal)

  • Jonathan Goyette

    ()
    (Department of Economics and GRÉDI, Université de Sherbrooke)

Abstract

The paper investigates the conflict that arises between the government, its bureaucrats and businesses in the tax collection process. We examine the effect of fiscal policy and corruption control mechanisms on the prevalence of tax evasion and corruption behaviour, and their impact on firm growth and social welfare. We first model a situation where bureaucrats are homogeneous and have complete bargaining power over firms in the negotiation of bribes during the tax collection process. In such a situation, the government can choose an optimal policy that involves the joint determination of a tax rate and a probability of detection of corrupt bureaucrats which leads to a no-corruption equilibrium. However, when the public administration is composed of bureaucrats with heterogeneous types defined by their ability to impose red tape costs on firms, we find that it is optimal to allow a certain level of corruption, given the cost of monitoring activities. We show how a government could face lose-lose as well as win-win situations in the conduct of its fiscal policies.

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Bibliographic Info

Paper provided by Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke in its series Cahiers de recherche with number 12-09.

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Length: 42 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:shr:wpaper:12-09

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Keywords: Corruption; Tax evasion; Tax administration;

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  1. Fisman, Raymond & Svensson, Jakob, 2007. "Are corruption and taxation really harmful to growth? Firm level evidence," Journal of Development Economics, Elsevier, vol. 83(1), pages 63-75, May.
  2. Bernard Gauthier & Ritva Reinikka, 2006. "Shifting Tax Burdens through Exemptions and Evasion: an Empirical Investigation of Uganda," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 15(3), pages 373-398, September.
  3. Basu, Kaushik & Bhattacharya, Sudipto & Mishra, Ajit, 1992. "Notes on bribery and the control of corruption," Journal of Public Economics, Elsevier, vol. 48(3), pages 349-359, August.
  4. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-23, October.
  5. Laszlo Goerke, 2008. "Bureaucratic corruption and profit tax evasion," Economics of Governance, Springer, vol. 9(2), pages 177-196, May.
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