Page 54 - Azerbaijan State University of Economics

Seda Ozekicioglu, Yilmaz Bayar: Tax revenues, corruption and governance in OECD
countries: a panel regression analysis

Studies are carried out by Weiss (1969), Tanzi and Zee (2000), Teera (2003) and Gupta (2007)
on causes that affect tax revenues. In all these studies, it is stated that abuse of public duty for
personal gain, that is corruption, is the most significant negative cause that affect tax revenues.
Besides, Bardhan (1997), Jain (2001), Aidt (2003), Svensson (2005) and Imam and Jacobs
(2007) in their studies determine that real per capita income, share of agriculture in GDP, trade
openness, inflation and corruption are the most important determinants of tax collection.

Each of control of corruption, government effectiveness, and quality of government regulation
and rules of law indicators has robust negative correlation with shadow economy. Schneider
(2005a) calculated the size and development of the shadow economy for 145 countries, including
developing, transition, and developed OECD countries, in between 1999-2003. Schneider
(2005b) estimated of the shadow economy for 110 countries, including developing, transition
and developed OECD economies. In both studies the econometric results show that the tax and
social security payment burden are the main forces of the shadow economy followed by the
developed and transition countries and by the tax moral variable for the highly developed OECD
countries. The two papers obtain that for the developing countries, the burden of state regulation
is the single most important factor. As seen in these studies, shadow economy and corruption
follow the same path and even cross each other depending on the same factors.
In the study by Serra (2006) to examine the causes of corruption, ‘Global Sensitivity Analysis’,
based on the Leamer’s Extreme-Bounds Analysis gives clear answers about the variables which
are strongly related to corruption. According to analysis results, corruption is lower in high-
income countries, where democratic institutions have been preserved for a long time and the
majority of population is Protestant. On the other hand corruption is higher where political
instability is a major problem. Lastly, a country’s colonial heritage appears to be a significant
determinant of present corruption level.

In a study by Kurtz and Shrank (2007), based on ordinary least square (OLS) regression analysis,
it is emphasized that there is a significant correlation between government effectiveness and
economic performance (i.e. economic growth) of the country. Dreher and et al., (2009) analyzed
the relationship between institutional quality, the shadow economy, and corruption. According to
the analysis results, it is seen that improving corporate quality reduces shadow economy and
affect the corruption market indirectly. However, according to the analysis results, the full
relationship between corruption and corporate quality is indefinite, and depends on the relative
effectiveness of corporate quality in shadow and corruption markets. The analysis also indicates
that the shadow economy and corruption are substitutes.

In the study, by Méon and Weill (2010), results of the panel study which monitored the
relationship between corruption, governance and efficiency in 69 developed and developing
countries are analyzed. In their study, it is stated that in countries where institutions are less
effective, corruption is less detrimental to efficiency. Corruption may even be positive relation
with efficiency in countries where institutions are extremely ineffective.

54