Corruption and Tax Burden: What Is the Joint Effect on Total Factor Productivity?

Kouramoudou Kéïta,Hannu Laurila

doi:10.3390/economies9010026

Kouramoudou Kéïta, Hannu Laurila

Open Access

https://doi.org/10.3390/economies9010026

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Abstract

A common conclusion in the literature is that both corruption and taxation hamper economic growth. It is also plausible that both affect total factor productivity, which, by the famous Solow residual, is a vital driver of economic progress. Moreover, corruption and tax burden are supposed to be intertwined. This paper focuses on the supposedly linked effects of corruption and tax burden on total factor productivity. The empirical study uses panel data from 90 countries for the time span of 1996–2014. The results show that both corruption and tax burden deteriorate total factor productivity, but that an increase in tax burden mitigates the negative effect of corruption.

Highlights

Corruption is usually defined as misuse of public office for private gain
The deviation between observed growth and that forecasted by increases in human and physical capital is called total factor productivity (TFP), which is known as the Solow residual
The results are not too far from those of Méon and Weill (2010), which suggests that corruption can improve efficiency: Reading the effect of the interaction term the other way round says that an increase in corruption mitigates the negative effect of tax burden on total factor productivity

Summary

Introduction

Corruption is usually defined as misuse of public office for private gain. The mainstream approach in the literature on the relationship between corruption and economic development is to focus on the link between corruption and investments or output growth. The second explanatory variable TaxBurdeni,t measures the taxpayers’ fiscal strain in the countries It includes both marginal tax rates and the overall level of taxation (direct and indirect taxes) imposed by central and local governments as a percentage of gross domestic product (GDP). The instruments are as follows: Inflation—commonly understood to affect economic performance negatively (Romer 1993; Lane 1997); Openness—captures “creation-transmission and absorption of knowledge”, “integration”, and “competition” as facilitators of TFP (Maddison 1997, 1999; Frankel and Romer 1999); Property rights—represents the quality of legal frameworks with supposedly positive correlation with TFP (Ulubasoglu and Doucouliagos 2004; Isaksson 2007); Government spending—the size of public budgets that should link to TFP through social infrastructure (Del Mar. Salinas-Jiménez and Salinas-Jiménez 2011); Improved sanitation—a proxy for health with assumedly positive connection to TFP; Energy use, Electricity, and Transport service—reflect technical infrastructure that should facilitate TFP (Aschauer 1989); Military expenditure—.

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