Page 53 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.74, # 2, 2017, pp. 51 - 63

In other words, increase in corruption causes decrease in income taxes of tax payers. On the
other hand, corruption exaggerates the volume of government spending and reduces the
productivity of effective government expenditure. All these negativities trigger inflation and
lower growth rates (Ghosh and Neanidis, 2010: 25).

Presence of asymmetrical information among bureaucrats/politicians versus public triggers
corruption as well. Having specialized knowledge not easily understood by public brings out
power to bureaucrats/politicians. Knowledge and power in public sector increase corruption
especially in underdeveloped and developing countries. As public corporations have
monopolized, certain interest groups become a part of government policies and begin to gain
power, and all these lead to an increase in bureaucratic/political corruption in the country (Dong
and Eom, 2008: 301). Additionally, asymmetrical information among bureaucrats/politicians
affects level of expenditure per person and decrease tax revenues (Mačkić, 2014: 7).
In this study, we research the effect of corruption, government effectiveness, regulatory quality,
and rule of law representing the quality of public administration on the total tax revenues in 35
OECD countries during the periods 2002-2015 by employing panel regression analysis. So the
study will be one of the early studies investigating the effect of corruption and public governance
on tax revenues and in turn make a contribution to the relevant literature. In the coming section,
the relevant empirical literature will be summarized, then data and econometric methodology
will be described in Section 3. Section 4 presents empirical analysis and major findings. Finally,
the study will be over with Section 5.

2. Literature Review

The public sector has become an important determinant of economic growth in the context of
endogenous growth theories. In this regard, the researchers have focused on the government
expenditures and public finance especially tax revenues. So determinants of tax revenues has
gained importance and some scholars have researched the interaction between corruption,
governance and tax revenues in the recent years and discovered that both corruption and different
governance indicators have had significant effect on the tax revenues.

Ghura (1998) conducted a research on the relationship between corruption and taxes in 39 Sub-
Saharan African Countries and revealed strong statistical evidence that an increase in the level of
corruption lowers the tax-revenue/GDP ratio. On the other side, Tanzi and Davoodi (2000)
observe that corruption in developing countries is at a higher level and corruption has a greater
impact on direct taxes in these countries. Also, corruption in developing countries displays a
coherent correlation with the high level of tax evasion in these countries. In the paper, it is
calculated that a 4 point reduction in corruption can increase direct taxes in developing countries,
as a group, by 7,2 percent of GDP. In the study by Treisman (2000) analyzed ‘perceived
corruption’ based on certain indexes. According to the analysis results; countries with Protestant
traditions, histories of British rule, more developed economies, more democratic regime and
higher imports are less corrupt. On the other hand federal states are more corrupt.

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