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/
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- 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
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
Comparisons between years should be viewed as indicative; some countries included in 2005 were not included in 2000.
- 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
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
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
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
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.
©2014 by Walter de Gruyter Berlin / Boston