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Corruption, Optimal Taxation, and Growth

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  • Raul A. Barreto
  • James Alm

Abstract

How does the presence of corruption affect the optimal mix between consumption and income taxation? In this article, the authors examine this issue using a simple neoclassical growth model, with a self-seeking and corrupt public sector. They find that the optimal tax mix in a corrupt economy is one that relies more heavily on consumption taxes than on income taxes, relative to an economy without corruption. Their model also allows them to investigate the effect of corruption on the optimal (or welfare-maximizing) size of government, and their 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.

Suggested Citation

  • Raul A. Barreto & James Alm, 2003. "Corruption, Optimal Taxation, and Growth," Public Finance Review, , vol. 31(3), pages 207-240, May.
  • Handle: RePEc:sae:pubfin:v:31:y:2003:i:3:p:207-240
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    References listed on IDEAS

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    1. Gilles Saint-Paul, 1992. "Fiscal Policy in an Endogenous Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1243-1259.
    2. Barreto, Raul A., 2000. "Endogenous corruption in a neoclassical growth model," European Economic Review, Elsevier, vol. 44(1), pages 35-60, January.
    3. Pual Pecorino, 1992. "Rent Seeking and Growth: The Case of Growth through Human Capital Accumulation," Canadian Journal of Economics, Canadian Economics Association, vol. 25(4), pages 944-956, November.
    4. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
    5. Robert J. Barro & Xavier Sala-I-Martin, 1992. "Public Finance in Models of Economic Growth," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 645-661.
    6. Hartwick, John M., 1992. "Endogenous growth with public education," Economics Letters, Elsevier, vol. 39(4), pages 493-497, August.
    7. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
    8. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-834, August.
    9. Devereux, Michael B & Mansoorian, Arman, 1992. "International Fiscal Policy Coordination and Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 249-268, May.
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    Citations

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    Cited by:

    1. Nicholas Apergis & Dan Constantin Dănuleţiu, 2013. "Public deficit, public debt, corruption and economic freedom: some empirical evidence from Romania," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 16(48), pages 3-22, June.
    2. Litina, Anastasia & Palivos, Theodore, 2016. "Corruption, tax evasion and social values," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 164-177.
    3. Yongzheng Liu & Haibo Feng, 2015. "Tax structure and corruption: cross-country evidence," Public Choice, Springer, vol. 162(1), pages 57-78, January.
    4. Kammas, Pantelis & Litina, Anastasia & Palivos, Theodore, 2013. "The Quality of Public Education in Unequal Societies: The Role of Tax Institutions," MPRA Paper 52193, University Library of Munich, Germany.
    5. Joseph G. ATTILA, 2008. "Corruption, taxation and economic growth: theory and evidence," Working Papers 200829, CERDI.
    6. James Alm & Jorge Martinez-Vazquez & Chandler McClellan, 2016. "Corruption and Firm Tax Evasion," Working Papers 1624, Tulane University, Department of Economics.
    7. Roy Cerqueti & Raffaella Coppier, 2015. "Corruptibility and tax evasion," European Journal of Law and Economics, Springer, vol. 39(2), pages 355-373, April.
    8. Anastasia Litina & Theodore Palivos, 2015. "Corruption and Tax Evasion: Reflections on Greek Tragedy," Working Papers 193, Bank of Greece.
    9. Rodrigues-Neto, José A., 2014. "On corruption, bribes and the exchange of favors," Economic Modelling, Elsevier, vol. 38(C), pages 152-162.
    10. Květa Kubátová, 2009. "Optimal Taxation - Review of Theory," Český finanční a účetní časopis, University of Economics, Prague, vol. 2009(3), pages 24-36.
    11. Alm, James & Martinez-Vazquez, Jorge & McClellan, Chandler, 2016. "Corruption and firm tax evasion," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 146-163.
    12. Mehmet Tosun, 2006. "Explaining the Variation in Tax Structures in the MENA Region," Working Papers 06-018, University of Nevada, Reno, Department of Economics;University of Nevada, Reno , Department of Resource Economics.
    13. Dzhumashev, Ratbek, 2008. "Corruption and regulatory burden," MPRA Paper 2081, University Library of Munich, Germany.
    14. Jos� A. Rodrigues-Neto, 2009. "Sex, Money and Corruption," ANU Working Papers in Economics and Econometrics 2009-500, Australian National University, College of Business and Economics, School of Economics.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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