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Corruption and firm tax evasion

James Alm (), Jorge Martinez-Vazquez () and Chandler McClellan

Journal of Economic Behavior & Organization, 2016, vol. 124, issue C, 146-163

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.

Keywords: Tax compliance; Corruption; Bribery (search for similar items in EconPapers)
JEL-codes: D7 H26 H32 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (86)

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Working Paper: Corruption and Firm Tax Evasion (2016) Downloads
Working Paper: Corruption and Firm Tax Evasion (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:124:y:2016:i:c:p:146-163

DOI: 10.1016/j.jebo.2015.10.006

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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