The impact of local corruption on business tax registration and compliance: Evidence from Vietnam

Abstract

This paper studies how corruption affects two fundamental dimensions of a firm’s tax compliance: the likelihood of tax registration (possession of a tax ID) and the tax compliance ratio (the ratio between the firm’s tax payment and revenue). We explore a census covering all Vietnamese household businesses and leverage the differential exposure to corruption, depending upon which province similarly situated businesses are located within. Comparing household businesses in contiguous commune pairs that straddle provincial borders, we discover two seemingly contradictory results. We find that a household business that operates in a more corrupt province is more likely to possess a tax ID, even though it does not necessarily pay more in taxes. In fact, among firms that possess tax IDs, an increase in corruption is associated with a decrease in the tax compliance ratio. We suggest a plausible explanation for this pattern is that corrupt bureaucrats encourage tax-ID possession, because the registration form provides them with better business information to extract bribes. This mechanism implies that an increase in corruption should be associated with a smaller increase in tax-ID possession among more “visible” businesses. We test and find supporting empirical evidence for this prediction.