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Fiscal policy and corruption

Author

Listed:
  • 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.

Suggested Citation

  • Bernard Gauthier & Jonathan Goyette, 2012. "Fiscal policy and corruption," Cahiers de recherche 12-09, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke.
  • Handle: RePEc:shr:wpaper:12-09
    as

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    File URL: http://gredi.recherche.usherbrooke.ca/wpapers/GREDI-1209.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Corruption; Tax evasion; Tax administration;

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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