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Corruption and Firm Tax Evasion

Author

Listed:
  • James Alm

    () (Department of Economics, Tulane University)

  • Jorge Martinez-Vazquez

    () (Andrew Young School of Policy Studies, Georgia State University)

  • Chandler McClellan

    () (National Bureau of Economic Research)

Abstract

Although corruption and tax evasion are distinct and separate problems, they can easily become intertwined and reinforcing. A society that is more corrupt may enable more tax evasion as corrupt officials seek more income via bribes; conversely, higher levels of tax evasion may drive corruption by offering more opportunities for bribes. While a large body of work on each subject separately has emerged, the relationship between the two problems has remained a largely unexplored area. This paper focuses on how the potential for bribery of tax officials affects a firm's tax evasion decisions. To test how the potential for bribery affects a firm's tax reporting decisions, we use firm-level information on reporting obtained from the World Enterprise Survey and the Business Environment and Enterprise Performance Survey. Our basic estimation approach uses instrumental variables methods to control for the potential endogeneity of evasion and corruption. We also use propensity score matching methods as a robustness check. Our results show that it is corruption that largely drives higher levels of evasion; that is, corruption of tax officials is a statistically and economically significant determinant of tax evasion. The presence of tax inspectors who request bribes results in a reduction of sales reported for taxes of between 4 and 10 percentage points. Additionally, larger bribes result in higher levels of evasion. Overall these results indicate that governments seeking to decrease tax evasion - and so increase tax revenues - must work first to ensure an honest tax administration.

Suggested Citation

  • James Alm & Jorge Martinez-Vazquez & Chandler McClellan, 2016. "Corruption and Firm Tax Evasion," Working Papers 1624, Tulane University, Department of Economics.
  • Handle: RePEc:tul:wpaper:1624
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    File URL: http://repec.tulane.edu/RePEc/pdf/tul1624.pdf
    File Function: First Version, December 2016
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    References listed on IDEAS

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    Cited by:

    1. Kamm, Aaron & Koch, Christian & Nikiforakis, Nikos, 2017. "The ghost of institutions past: History as an obstacle to fighting tax evasion," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168271, Verein für Socialpolitik / German Economic Association.
    2. Bernard GAUTHIER & Frédéric LESNÉ, 2017. "Measuring corruption in presence of reticent respondents: Theory and Application," Working Papers P207, FERDI.
    3. Bernard GAUTHIER & Frédéric LESNÉ, 2017. "Measuring corruption in presence of reticent respondents: Theory and Application," Working Papers P207, FERDI.
    4. Cyan, Musharraf R. & Koumpias, Antonios M. & Martinez-Vazquez, Jorge, 2016. "The determinants of tax morale in Pakistan," Journal of Asian Economics, Elsevier, vol. 47(C), pages 23-34.
    5. Keita Kouramoudou, 2017. "Does Corruption Affect Total Factor Productivity? An Empirical Analysis," Working Papers 1714, University of Tampere, School of Management, Economics.
    6. Roman M. Sheremeta & Neslihan Uler, 2016. "The Impact of Taxes and Wasteful Government Spending on Giving," Working Papers 16-07, Chapman University, Economic Science Institute.
    7. Björn Jahnke, 2017. "How does petty corruption affect tax morale in sub-Saharan Africa? An empirical analysis," WIDER Working Paper Series 008, World Institute for Development Economic Research (UNU-WIDER).
    8. Chowdhury Mohammad Sakib Anwar & Alexander Matros & Sonali Sen Gupta, 2018. "Tax Evasion, Embezzlement and Public Good Provision," Working Papers 232397285, Lancaster University Management School, Economics Department.
    9. repec:spr:qualqt:v:52:y:2018:i:1:d:10.1007_s11135-017-0471-1 is not listed on IDEAS
    10. James Alm, 2017. "Is Economics Useful for Public Policy?," Working Papers 1702, Tulane University, Department of Economics.
    11. repec:liu:liucej:v:15:y:2018:i:1:p:11-36 is not listed on IDEAS
    12. Steve Loris Gui-Diby & Saskia Mösle, 2017. "Governance and development outcomes: re-assessing the two-way causality," MPDD Working Paper Series WP/17/06, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
    13. Roukiatou Nikiema & Pam Zahonogo, 2017. "Taxpayer behaviour and institutions in Sub-Saharan Africa," BeFinD Working Papers 0119, University of Namur, Department of Economics.
    14. Marques II, Israel, 2018. "Firms and social policy preferences under weak institutions : Evidence from Russia," BOFIT Discussion Papers 7/2018, Bank of Finland, Institute for Economies in Transition.
    15. Jahnke, Bjoern, 2015. "How does petty corruption affect tax morale in sub-Saharan Africa? An empirical analysis," Hannover Economic Papers (HEP) dp-564, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    16. Kochanova,Anna & Hasnain,Zahid & Larson,Bradley Robert, 2016. "Does e-government improve government capacity ? evidence from tax administration and public procurement," Policy Research Working Paper Series 7657, The World Bank.
    17. Nguyen, Ngoc Anh & Doan, Quang Hung & Tran-Nam, Binh, 2017. "Tax corruption and private sector development in Vietnam," MPRA Paper 84300, University Library of Munich, Germany.
    18. James Alm & Yongzheng Liu, 2018. "Corruption, Taxation, and Tax Evasion," Working Papers 1802, Tulane University, Department of Economics.
    19. repec:kap:porgrv:v:17:y:2017:i:4:d:10.1007_s11115-016-0351-5 is not listed on IDEAS

    More about this item

    Keywords

    Tax compliance; corruption.;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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