Tax structure and corruption: cross-country evidence

Abstract

One common feature of the current literature on corruption, especially the empirical contributions to it, is the emphasis on the exogenous determinants of corruption, which are generally beyond the direct control of governments. To date, little is known about how the design of government policy potentially affects the level of corruption in a country, even though there is growing recognition that the design and administration of tax and spending policies play important roles in promoting or discouraging corrupt practices. Using a large sample of countries over the 1995–2009 period, this paper fills the gap by conducting the first analysis in the literature to examine the significance of the tax structure, as measured by both tax mix and tax complexity, in determining corruption. Our results suggest the following: (1) countries relying more heavily on direct taxes tend to exhibit less corruption than countries that rely more heavily on indirect taxes, and (2) countries with more complex tax systems tend to be more corrupt than countries with less complex tax systems. These results are robust across alternative measures of corruption and tax structure and alternative estimations with and without correcting the potential endogeneity issue of the tax structure variables.