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Tax Evasion in a Corrupt Economy

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  • Edimon Ginting

Abstract

Tax evasion has been studied intensively in the context of developed countries in which the institutional environment assumes a pervasive respect for the rule of law. In many developing nations such an assumption is not warranted. The objective of this paper is to develop a model of tax evasion apposite to an institutional set up in which corruption is endemic. The services of corrupt intermediaries are required by otherwise legitimate producers in order to navigate the informal 'laws' put in place by rent seekers with good connections. The model developed here posits a service providing industry which produces legitimate public services and corrupt intermediation as joint products which exploit economies of scope available to senior bureaucrats. The model can be used in various ways; in this paper a cut in the tax rate on income from capital is examined. Under certain conditions such a cut can lead to increased government revenue, giving a new explanation of how a kind of Laffer curve may operate in economies with endemic corruption.

Suggested Citation

  • Edimon Ginting, 1999. "Tax Evasion in a Corrupt Economy," Centre of Policy Studies/IMPACT Centre Working Papers g-133, Victoria University, Centre of Policy Studies/IMPACT Centre.
    • Handle: RePEc:cop:wpaper:g-133
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    References listed on IDEAS

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    1. Fullerton, Don, 1982. "On the possibility of an inverse relationship between tax rates and government revenues," Journal of Public Economics, Elsevier, vol. 19(1), pages 3-22, October.
    2. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
    3. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    4. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922.
    5. Jung, Young H. & Snow, Arthur & Trandel, Gregory A., 1994. "Tax evasion and the size of the underground economy," Journal of Public Economics, Elsevier, vol. 54(3), pages 391-402, July.
    6. Edimon Ginting & Alan A. Powell, 1998. "The Economy-wide Impact of Better Governance: Cutting Informal Taxes in Indonesia," Centre of Policy Studies/IMPACT Centre Working Papers op-92, Victoria University, Centre of Policy Studies/IMPACT Centre.
    7. Kimberly Ann Elliott, 1997. "Corruption and the Global Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 12, October.
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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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