Tax Evasion,Corruption and Market Entry

We analyze the impact of tax policy on the market entry of firms in the presence of corruption and tax evasion. In a world with corruption, firms must bribe corrupt officials to enter the market. For a given level of bribes, higher tax rates and stricter enforcement of taxation decrease tax evasion but typically reduce market entry. However, when the level of bribes reacts to tax policy, higher taxes and stricter enforcement of taxation can have a double benefit. Up to a certain threshold, for which we develop a simple rule, stricter enforcement increases market entry and reduces tax evasion.     

The demand for tax haven operations

What types of firms establish tax haven operations, and what purposes do these operations serve? Analysis of affiliate-level data for American firms indicates that larger, more international firms, and those with extensive intrafirm trade and high R and D intensities, are the most likely to use tax havens. Tax haven operations facilitate tax avoidance both by permitting firms to allocate taxable income away from high-tax jurisdictions and by reducing the burden of home country taxation of foreign income. The evidence suggests that the primary use of affiliates in larger tax haven countries is to reallocate taxable income, whereas the primary use of affiliates in smaller tax haven countries is to facilitate deferral of U.S. taxation of foreign income. Firms with sizeable foreign operations benefit the most from using tax havens, an effect that can be evaluated by using foreign economic growth rates as instruments for firm-level growth of foreign investment outside of tax havens. One percent greater sales and investment growth in nearby non-haven countries is associated with a 1.5 to 2% greater likelihood of establishing a tax haven operation.     

How does petty corruption affect tax morale in Sub-Saharan Africa?

Revenues from taxation gain in importance to finance economic development in Sub-Saharan Africa. One obstacle to enhancing the willingness to remit taxes can be the extortion of bribes by public officials. Using micro-level data from the Afrobarometer, we show that petty corruption erodes tax morale. The effect on tax morale is more severe in countries and regions where fewer people are affected by petty corruption and becomes insignificant if extortion of bribes is particularly prevalent. Differing levels of civic participation and potential access to tax funded services are also found to induce heterogeneous reactions to corruption experience. Applying a mediation analysis, we demonstrate that petty corruption not only has a direct effect on tax morale but also diminishes confidence in tax authorities and therefore affects tax morale indirectly. The harmful effects of corruption experience, however, operate mainly through a generally lowered inclination to uphold high levels of tax morale.     

Is corruption a greater burden for registered MSEs? Evidence from Zambia

If corrupt bureaucrats target registered firms, then corruption may discourage registration. Using data from a survey of 4,801 micro and small enterprises (MSEs) in Zambia, this paper looks at whether corruption is a more or less serious problem for registered MSEs. Consistent with earlier studies, the results suggest registered MSEs are more concerned about corruption than unregistered firms are. The paper also proposes two reasons why corruption might affect registered MSEs differently than it affects unregistered firms. We first suggest that registered firms might meet with government officials more often than unregistered firms, giving corrupt officials more opportunities to demand bribes from them, but we also suggest that registered firms might be less vulnerable when officials demand bribes because they are more able to complain about bribe demands. This could offset registered firms' disadvantage because of more frequent meetings. The evidence supports the first, but not the second, hypothesis. Registered firms were more likely to meet with government officials but were not consistently less likely to pay bribes when they did meet with them.     

Tax Havens,Growth, and Welfare

This paper develops an endogenous growth model featuring tax havens, and uses it to examine how the existence of tax havens affects the economic growth rate and social welfare in high‐tax countries. We show that the presence of tax havens generates two conflicting channels in determining the growth effect. First, the public investment effect states that tax havens may erode tax revenues and in turn decrease the government's infrastructure expenditure, thereby reducing growth. Second, the tax planning effect of tax havens reduces marginal cost of capital and hence encourages capital accumulation so as to spur economic growth. The overall growth effect is ambiguous and is determined by the extent of these two effects. The welfare analysis shows that tax havens are more likely to be welfare‐enhancing if the government expenditure share in production is low, or the initial income tax rate is high. Moreover, the welfare‐maximizing income tax rate is lower than the growth‐maximizing income tax rate if tax havens are present.     

Tax revenues, fiscal corruption and “shame” costs

In this paper we explore tax revenues in a regime of widespread fiscal corruption in a static framework. We prove that the relationship between the tax rate and tax revenues depends on the relevance of the “shame effect” of being detected in a corrupt transaction. In countries with a “low shame” effect, tax revenues grow as the tax rate increases. Moreover, there is a critical tax rate where the growth rate of tax revenues begins to reduce. In countries with a high “shame effect” tax revenues increase up to a threshold value and then decrease.     

Tax Enforcement Policy and the Provision of Public Goods with the Presence of Tax Havens

A tax competition model is presented to investigate the effects of tax havens on the public good provision. We show that when countries facing a rise in tax havens change their tax enforcement strategies in response, the existence of tax havens may result in a higher level of equilibrium public good provision as compared to the case with no tax havens. Accordingly, tax havens could be welfare enhancing for non‐haven countries. This result offers a possible explanation for the recent empirical evidence that the corporate tax revenues in high‐tax countries have actually increased with the growth in the flow of foreign direct investment to tax havens.     

Tax competition with parasitic tax havens

We develop a tax competition framework in which some jurisdictions, called tax havens, are parasitic on the revenues of other countries, and these countries use resources in an attempt to limit the transfer of tax revenue from capital taxation to the havens. We demonstrate that the full or partial elimination of tax havens would improve welfare in non-haven countries. We also demonstrate that the smaller countries choose to become tax havens, and we show that the abolition of a sufficiently small number of the relatively large havens leaves all countries better off, including the remaining havens. We argue that these results extend to the case where there are also taxes on wage income that involve administrative and compliance costs.     

POLICY COMPROMISES: CORRUPTION AND REGULATION IN A DEMOCRACY

This paper evaluates the extent of regulation in a democracy with corruption. Elected politicians can restrict entry of firms in exchange for bribes from entrepreneurs. Full liberalization implies free entry and allocative efficiency. Voters re‐elect politicians based on observed performance. We demonstrate that voters agree to tolerate corruption and inefficient regulation; that efficient policies can be promoted by productivity growth; that productivity growth reduces the cost of providing wage incentives; and that corruption is procyclical and economic policy is countercyclical in a corrupt democracy.     

Country governance,corruption, and the likelihood of firms’ innovation

Using a sample of firms from the World Bank Enterprise Survey for the period 2006–2016 in emerging and developing countries, we find that corruption has a negative impact on the likelihood of innovations, thus supporting the “sanding-the-wheels” hypothesis. Our empirical results also show that corruption at the firm level, in the manufacturing industry, and in regions with the worst governance or that are more corrupt has a significant negative effect on innovation. In addition, country governance plays a particularly important role in innovative activity for corrupt firms. The policy implication is that the government or authority should strengthen the positive role of government effectiveness, rule of law, regulatory quality, and control of corruption in order to improve firms’ innovation within an environment of corruption.     

Optimal Thin Capitalisation Rule in a Simple Endogenous Growth Model with Tax Havens

In this paper we study the optimal thin capitalisation rules by developing a simple dynamic general‐equilibrium growth model incorporating tax havens. It is found that a stricter thin capitalisation rule will reduce the incentive to invest, and is therefore harmful to growth. This effect is ignored in previous static studies on the welfare analysis of tax havens. Accordingly, when taking the growth effect into consideration, reducing the utilisation of tax havens has ambiguous effects on social welfare. We also show that a looser thin capitalisation rule could be favourable for the policymakers if (i) the production technology is high; (ii) the existing income tax rate is high; (iii) the rate of time preference is low; or (iv) the weight factor of public consumption in utility is small.     

The nexus between public sector corruption and private sector efficiency: Evidence from worldwide firm-level data

Anti-corruption is highlighted as one of the key institutional principles by the United Nations, as corruption hinders the progress in achieving sustainable development goals. However, the extant literature on how private firms' efficiency is influenced by corruption prevailing in regulatory agencies across economies has been inconclusive. Analyzing the World Bank Enterprise Survey data across 45,121 firms from 80 countries, this study finds that bribe payments to corrupt public officials by firms causes bureaucratic delays. Employing an instrumental variable Tobit framework to address the issue of endogeneity inherited with observational data, this study demonstrates that an increase in the magnitude of bribes and depth of corruption by one percentage point separately expands the firm managers' time being spent on regulatory requirements by 2.78 percentage points and 2.47 percentage points, respectively. The findings are robust to different specifications. The results imply the importance of promoting anti-corruption measures across countries to create a conducive environment for firms to enhance efficiency, and thereby to achieve sustainable development goals successfully.     

Corruption and privatization

This paper analyses the relation between corruption and privatization. In particular, we study how corruption affects the acquisition price and the post-privatization market structure. The model predicts that privatization in countries with highly corrupt government results in a higher degree of market concentration than in countries where governments are less corrupt. The acquisition price is also likely to be higher when a government is highly corrupt than when government officials are honest or moderately corrupt. Finally, and perhaps surprisingly, we demonstrate that a stronger propensity to embezzle state revenues may reduce government officials' benefits from corruption. The reason is that the more eager the government officials are to take bribes, the cheaper they are to buy.     

Corruption and cross-border investment by multinational firms

Motivated by previous studies on the effect of corruption on foreign direct investment, we examine the impact of a distance measure of corruption between host and source countries on cross-border direct investment and find that corruption distance deters cross-border investment. The evidence indicates that corruption distance is not as serious a deterrent of outward direct investment from more-corrupt countries as it is from less-corrupt countries. We conclude that multinational firms with the capacity to engage in bribery can disregard this activity in transparent environments, whereas multinational firms accustomed to operating in transparent environments find it difficult to overcome the administrative complexities in corrupt environments. Journal of Comparative Economics 34 (4) (2006) 839–856.     

Which countries become tax havens?

This paper analyzes the factors influencing whether countries become tax havens. Roughly 15% of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Controlling for other relevant factors, governance quality has a statistically significant and quantitatively large association with the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 26% to 61% as governance quality improves from the level of Brazil to that of Portugal. Evidence from US firms suggests that low tax rates offer much more powerful inducements to foreign investment in well-governed countries than do low tax rates elsewhere. This may explain why poorly-governed countries do not generally attempt to become tax havens, and suggests that the range of sensible tax policy options is constrained by the quality of governance.     

Economic growth,corruption and tax evasion

In this paper, we explore tax revenues in a regime of widespread corruption in a growth model. We develop a Ramsey model of economic growth with a rival but non-excludable public good which is financed by taxes which can be evaded via corrupt tax inspectors. We prove that the relationship between the tax rate and tax collection, in a dynamic framework, is not unique, but is different depending on the relevance of the “shame effect”. We show that in all three cases — “low, middle and high shame” countries, the growth rate increases as the tax rate increases up to a threshold value, after which the growth rate begins to decrease as the tax rate increases. But, for intermediate tax rates, the rate of growth for “low shame” countries is lower than that of “uniform shame” countries which is, in turn, lower than that of “high shame” countries. This happens because the growth rate is more sensitive to variations of t in an honest country rather than in a corrupt country.     

Who gains from non-collusive corruption?

Non-collusive corruption, i.e., corruption that imposes an additional burden on business activity, is particularly widespread in low-income countries. We build a macroeconomic model with credit market imperfections and heterogeneous agents to explore the roots and consequences of this type of corruption. We find that credit market imperfections, by generating rents for the incumbent entrepreneurs, create strong incentives for corrupt behavior by state officials. However, non-collusive corruption not only redistributes income from non-officials towards officials but also within the group of potential entrepreneurs. If borrowing is limited, bribes prevent poorer but talented individuals from starting a business. But this is likely to benefit those who may enter anyway; the cost of capital is lower and there is less competition on the goods markets.     

Why is corruption less harmful in some countries than in others?

Empirical evidence shows that not all countries with high levels of corruption have suffered poor growth performance. Bad quality governance has clearly been much less damaging (if at all) in some economies than in others. Why this is so is a question that has largely been ignored, and the intention of this paper is to provide an answer. We develop a dynamic general equilibrium model in which growth occurs endogenously through the invention of new goods based on research and development activity. For such activity to be undertaken, firms must acquire complementary licenses from public officials who are able to exploit their monopoly power by demanding bribes in exchange for these (otherwise free) permits. We show that the effects of corruption depend on the extent to which bureaucrats coordinate their rent-seeking behaviour. Specifically, our analysis predicts that countries with organised corruption networks are likely to display lower levels of bribes, higher levels of research activity and higher rates of growth than countries with disorganised corruption arrangements.     

The OECD Anti-Bribery Convention: Changing the currents of trade

This paper examines how criminalizing the act of bribing a foreign public official affects international trade flows using a watershed global anti-corruption initiative — the 1997 OECD Anti-Bribery Convention. I exploit variation in the timing of implementation by exporting countries and in the level of corruption of importing countries to quantify the Convention's effects on bilateral exports. I use a large panel of country pairs to control for confounding global and national trends and shocks. I find that, on average, the Convention caused a reduction in exports from signatory countries to high corruption importers relative to low corruption importers. In particular, we observe a 5.7% relative decline in bilateral exports to importers that lie one standard deviation lower on the Worldwide Governance Indicators corruption index. This suggests that by creating large penalties for foreign bribery, the Convention indirectly increased transaction costs between signatory countries and high corruption importers. The Convention may have induced OECD firms to divert their exports to less corrupt countries; while non-OECD firms not bound by the Convention may have increased their exports to corrupt countries. I also find evidence that the Convention's effects differed across product categories.     

The impact of endogenous tax treaties on foreign direct investment: theory and evidence

Abstract .  This paper investigates the effect of tax treaties on bilateral stocks of outward FDI. For this purpose we employ a numerically solvable general equilibrium model of trade and multinational firms to study the impact of tax treaties on both welfare and outward FDI. The model indicates under which factor endowment configurations countries gain in welfare when implementing a tax treaty. This motivates an empirical specification of the endogenous selection into implementing new tax treaties. Using data of bilateral OECD outward FDI between 1985 and 2000, we find a significant negative impact of newly implemented tax treaties on outward FDI stocks.