Inspections, informal payments and tax payments by firms

Abstract

The aim of this paper is to look at the inspections, bribery, and tax nexus by first looking at the bidirectional causality between bribes and inspections, and then examining the implications of this broader definition of corruption for firms’ tax payments. In asking whether inspections are anticorruption instruments, where higher incidence of bribes attract greater inspections, or if inspections are another manifestation of corruption that can be tamped down with the payment of bribes, we find evidence for the latter. The empirical investigation is implemented using a firm-level panel dataset from Vietnam, a country that suffered from high levels of corruption and tax-complexity, and also one that made significant strides in reducing these issues. The contribution of this paper is threefold: to identify the direction of the relationship between bribes and inspections, to assess the firm level tax implication of this broader definition of corruption, and to do so using the application of simultaneous equations model estimation to uncover the direction of causality. The results indicate that while bribes directly lower tax and fees obligations of firms, the overlooked indirect effect that plays out through the reduced inspections channel is another 6% of the direct effect.