Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter April 22, 2014

Effect of Corruption on Tax Revenues in the Middle East

  • Patrick Amir Imam EMAIL logo and Davina Jacobs

Abstract

This study estimates the impact of corruption on the revenue-generating capacity of different tax categories in the Middle East. This is done over a period preceding the Global Crisis and the Arab Spring, to avoid any biases brought about by these two far reaching events. We find that the low revenue collection as a share of GDP in the Middle East, compared to other middle-income regions is due in part to corruption, with certain taxes more affected than others. Taxes that require frequent interaction between the tax authority and individuals, such as taxes on international trade, seem to be more affected by corruption than most other types of taxation. This suggests that once political stability returns to the region, if governments need to raise more tax revenues in a way that minimizes distortions and maximizes social welfare, they should implement reforms that either reduce corruption or raise revenues from tax categories that are less susceptible to corruption. Possible reforms of the revenue system and administration are examined.

Appendix: Data sources

Taxes: IMF Fiscal Affairs Department Tax Revenue Database, http://www-int.imf.org/depts/fad/info_guide/info_resources/databases/taxrevenue.htm

Real income per capita: International Financial Statistics.

Nonhydrocarbon GDP: IMF country desks.

Share of agriculture in economy: World Development Indicators.

Openness: Calculated ratio to GDP of the sum of exports and imports; World Development Indicators.

Inflation: CPI data, International Financial Statistics.

Corruption: International Country Risk Guide (ICRG) Corruption Index, http://www.icrgonline.com/

References

Abed, G. T., and S.Gupta, eds. 2002. Governance, Corruption, and Economic Performance. Washington, DC: International Monetary Fund.Search in Google Scholar

Ahmad, E., and T.Ajaz. 2010. “The Effect of Corruption and Governance on Tax Revenues.” Pakistan Development Review49(4):40517.Search in Google Scholar

Baer, K., O.Benon, and J.Toro. 2002. Improving Large Taxpayers’ Compliance: A Review of Country Experience. IMF Occasional Paper No. 215. Washington, DC: International Monetary Fund.Search in Google Scholar

Bird, R.2008. “Tax Challenges Facing Developing Countries.” Rotman Working Papers Series No. 12, Rotman Institute for International Business, University of Toronto.10.2139/ssrn.1114084Search in Google Scholar

Bird, R. 2010. Taxation and Development. World Bank Operational Studies No. 10150. Washington, DC: World Bank.Search in Google Scholar

Bond, S., A.Hoeffler, and J.Temple. 2001. “GMM Estimation of Empirical Growth Models.” CEPR Discussion Paper No. 3048.Search in Google Scholar

BP.2013. “Statistical Review of World Energy.”http://bp.com/statisticalreview.Search in Google Scholar

Blundell, R., and S.Bond. 1998. “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models.” Journal of Econometrics87:11543.10.1016/S0304-4076(98)00009-8Search in Google Scholar

Crandall, W., and J.-P.Bodin. 2005. Revenue Administration Reform in Middle Eastern Countries, 1994–2004. Working Paper No. 203. Washington, DC: International Monetary Fund.10.2139/ssrn.888072Search in Google Scholar

Dos Santos, P. S.1995. “Corruption in Tax Administration.” Presented at the Twenty-Ninth Annual Assembly of the Inter-American Center of Tax Administrators (CIAT), Lima, Peru, March 29.Search in Google Scholar

Dreher, A., and T.Herzfeld. 2005. “The Economic Costs of Corruption: A Survey and New Evidence.” Halle University, mimeo.10.2139/ssrn.734184Search in Google Scholar

Eltony, N.2002. “Determinants of Tax Efforts in Arab Countries.” Arab Planning Institute Working Paper No. 207.Search in Google Scholar

Ernst and Young.2003. “Corporate Taxation in the Middle East.” Available via the Internet: http://www.ey.com/global/download.nsf/Middle_East/Corporate_Taxation_Booklet/$file/Corporate%20Taxation%20booklet.pdf.Search in Google Scholar

Friedman, E., S.Johnson, D.Kaufmann, and P.Zoido-Lobaton. 2000. “Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries.” Journal of Public Economics76:45993.10.1016/S0047-2727(99)00093-6Search in Google Scholar

Gupta, A. S. 2007. Determinants of Tax Revenue Efforts in Developing Countries. IMF Working Paper No. 184. Washington, DC: IMF.10.5089/9781451867480.001Search in Google Scholar

IMF. 2008. Occasional Paper: Managing the Oil Revenue Boom: The Role of Fiscal Institutions. Edited by R. Ossowski, M. Villafuerte, P. Medas, and T. Theo. Washington, DC: IMF.Search in Google Scholar

Ivanova, A., M.Keen, and A.Klemm. 2005. The Russian Flat Tax Reform. Working Paper No. 16. Washington, DC: International Monetary Fund.10.2139/ssrn.874237Search in Google Scholar

Keen, M. 2003. Changing Customs: Challenges and Strategies for the Reform of Customs Administrations. Washington, DC: International Monetary Fund.Search in Google Scholar

Keen, M., and A.Simone. 2004. “Tax Policy in Developing Countries: Some Lessons from the 1990s and Some Challenges Ahead.” In Helping Countries Develop: The Role of Fiscal Policy, edited by S. Gupta, B. Clements, and G. Inchauste. Washington, DC: International Monetary Fund.Search in Google Scholar

Le, T. M., B.Moreno-Dodson, and N.Bayraktar. 2012. Tax Capacity and Tax Effort: Extended Cross-Country Analysis from 1994 to 2009. World Bank Policy Research Working Paper No. 6252. Washington, DC: World Bank.10.1596/1813-9450-6252Search in Google Scholar

Rodriguez, F., and D.Rodrik. 1999. Trade Policy and Economic Growth: A Skeptic’s Guide to Cross-National Evidence. NBER Working Paper No. 7081. Cambridge, MA: National Bureau of Economic Research.10.3386/w7081Search in Google Scholar

Tanzi, V. 1998. Corruption Around the World: Causes, Consequences, Scope, and Cures. Working Paper No. 63. Washington, DC: International Monetary Fund.10.2139/ssrn.882334Search in Google Scholar

Tanzi, V., and H.Zee. 2000. Tax Policy for Margining Markets: Developing Countries. Working Paper No. 35. Washington, DC: International Monetary Fund).10.2139/ssrn.879403Search in Google Scholar

Tanzi, V., and H. R.Davoodi. 1997. “Corruption, Public Investment, and Growth.” IMF Working Paper, 123.Search in Google Scholar

Wei, S.-J. 1997. Why Is Corruption So Much More Taxing Than Tax? Arbitrariness Kills. NBER Working Paper No. W6255. Cambridge: MA: National Bureau of Economic Research.10.3386/w6255Search in Google Scholar

  1. 1

    Among the possible forms of corruption in revenue administration, corruption in revenue audit may have the greatest negative impact on collections (Dos Santos 1995). Corrupt practices that occur when a taxpayer being audited could be preceded by tax evasion or understatement of revenue, partly because this is an environment where negotiating tax liabilities is the norm. A taxpayer not fearing the consequences of being caught will, in many countries, decide to evade taxes in the belief that even if tax officials detect the evasion, the tax auditor can be bribed and payment of the proper tax liability avoided.

  2. 2

    The Transparency International index is based on the opinion of experts. It intends to capture the extent to which “high government officials are likely to demand special payments” and “illegal payments are generally expected throughout lower levels of government” in the form of “bribes connected with import and export licenses, exchange controls, tax assessments, police protection, or loans.”

  3. 3

    Comparisons between years should be viewed as indicative; some countries included in 2005 were not included in 2000.

  4. 4

    Theory does not even provide a clear answer about the relationship between tax rates and the degree of compliance. If the fine on being caught depends on the amount of income or the amount of tax concealed, reducing tax rates may lead to an increase or decrease in compliance (see Ivanova, Keen, and Klemm 2005, for a literature review).

  5. 5

    Another possible reason for corruption in the tax administration could be pleasure in “beating the system.” This motivates some people who believe they are “smarter than the rest” and boast to their friends that they are bribing the tax auditors. But evidence for this proposition is weak.

  6. 6

    Attempts to estimate the difference between the official tax rate (the de jure rate) and the effective tax rate (the de facto rate), as a measure of the corruption level was not possible for lack of data.

  7. 7

    Using nonhydrocarbon taxes to nonhydrocarbon GDP is deemed a better measure for the taxation level of the population. The results do not change in any significant way when using overall taxes to overall GDP. These results are available on request from the authors.

  8. 8

    For instance, the punishment for an employee who accepts a bribe to expedite processing of a refund in the revenue administration may not be the same as the punishment for an auditor who accepts a bribe from a taxpayer to refrain from adjusting a tax liability. In both cases, the revenue administration officials should be fired but the criminal sanctions could be different.

Published Online: 2014-4-22
Published in Print: 2014-4-1

©2014 by Walter de Gruyter Berlin / Boston

Downloaded on 28.3.2024 from https://www.degruyter.com/document/doi/10.1515/rmeef-2014-0001/html
Scroll to top button