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Can tax simplification help lower tax corruption?
Rajul Awasthi 1•Nihal Bayraktar 2
Received:18July 2014/Revid:15January 2015/Accepted:20February 2015/
Published online:23April 2015
ÓEurasia Business and Economics Society 2015
Abstract This paper eks to find empirical evidence of a link between tax simplification and corruption in tax administration.It attempts to do this by first defining ‘‘tax simplicity’’as a measurable variable,and exploring empirical rela-tionships between simpler tax regimes and corruption in tax administrations.Cor-ruption in tax administration is calculated by using data ries from the World Bank’s Enterpri Survey Databa.The focus is on business taxes.104countries from different income groups and regions of the world are included in this study.The time period is 2002–2012.The empirical findings support the existence of a significant link between the measure of tax corruption and tax simplicity,so,a less complex tax system is shown to be associated with lower corruption in ta
x ad-ministration.It is predicted that the combined effect of a 10%reduction in both the number of payments and the time to comply with tax requirements can lower tax corruption by 9.64%.Some interesting regional differences are obrved in the results.While the impact on tax simplification on tax corruption is expected to be the highest in the LAC and SSA regions,the weakest economic significance is obrved in the SASIA and EAP regions.Similarly,the income level of countries plays an important role in determining the impact of tax simplification on tax corruption;specifically,the link is stronger for lower income level countries.The positive link between tax simplicity and lower tax corruption has uful policy implications.
&Nihal Bayraktar nxb23@psu.edu
Rajul Awasthi
rawasthi@worldbank
1Tax Policy and Revenue Administration,Governance Global Practice,TheWorld Bank,1818H
St,Washington 20433,DC,USA
2
Penn State University,Harrisburg,School of Business Administration,777W.Harrisburg Pike,Middletown 17057,PA,USA Eurasian Econ Rev (2015)5:297–330
DOI 10.1007/s40822-015-0014-9
词汇分类Keywords TaxesÁTax corruptionÁTax simplificationÁTime to comply taxesÁNumber of tax payments
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JEL Classification H2ÁD73
1Introduction
The tax administration of a country plays a central role in raising much needed revenues tofinance government expenditures.No state can exist without taxes.In today’s world taxes go beyond merely raising revenues;they signify the‘‘fiscal contract’’between society and its government,the so-called‘‘price for civiliza-tion’’(attributed to Holmes1904).The willingness for people of a country to pay tax relates very strongly with their identification with the state as citizens of the country they live in.1This intrinsic willingness to pay tax—also referred to as tax morale—is higher where taxpayers have more confidence in the integrity of government,and more specifically,the integrity of the tax administration. Therefore,a corruption-free tax administration is the basis for establishing good gover
nance,the foundation on which a strongfiscal contract can be built,and determines the extent to which people are happy to voluntarily comply with their tax duties.
Intuitively,there is an understanding that complexity of the tax system gives ri to corruption:the more complex a tax regime,the greater the opportunity for corruption.Complexity in tax law leads to opportunities for multiple interpreta-tions of tax statutes,giving ri to incentives for choosing the lowest-tax options. Whether a tax official accepts the low-tax interpretation or not is at their discretion.Given that significant monetary stakes could be involved,this provides rent-eking opportunities to tax officials.But,even at a more basic rvice-delivery level,tax corruption from complexity can ari.Complex declaration forms,high costs of compliance,and intricate compliance procedures may provide rent-eking opportunities to tax officials that‘‘facilitate’’tax compliance for a ‘‘fee’’.2Both the types of complexity exist in varying degrees in tax administrations around the world,but typically in developing countries with low levels of‘‘maturity’’of tax administrations,complex tax administrations abound. And,conquently,corruption in tax administrations is en as a rious problem in developing countries,with a detrimental impact on tax collections,and on tax morale.
军训自我鉴定100字This paper attempts to answer the question of whether or not there is empirical evidence that would link tax complexity and corruption in tax administrations.In the literature,there are veral studies inv
estigating the link between tax corruption 1For example,if income equality is considered important,people may be willing to pay specific taxes
(Amine and Dos Santos2013).
2Ekelund and Tollison(1984),Tanzi(1994),Mauro(1997),and Palda(2001)study the link between rent-eking behavior and corruption.
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and taxes3and also the link between tax complexity and taxes.4But,there are only a very limited number of empirical studies on the relationship between tax corruption and tax complexity which can be considered as an important component of the transmission mechanism between tax complexity and taxes.None of the studies on tax corruption and tax complexity involve a cross-country dimension.For example,Obwona and Muwonge(2002)and Kasimbazi(2003)find tax complexity and lack of transparency leads to tax corruption in Uganda,but focus only on one country in their analysis.
In this paper,tax corruption is measured directly by usingfirm-level data from 104different countries.Given data availability,we focus only on business taxes (corporate taxes,value added tax,and labor taxes)and exclude personal income tax. The main data source is the World Bank’s Ent
erpri Survey(ES)Databa.The datat covers the years from2002to2012.Tax complexity is measured with two alternative variables:time to comply with tax requirements and the number of tax payments,both of which are from the World Bank’s doing business(DB)databa. In this paper we try to identify empirical determinants of tax corruption,including tax complexity indicators,through different regression analys.In the benchmark regression specification,tax corruption is the dependent variable,while tax complexity indicators and control variables are included as independent variables. The control variables include political and institutional determinants of tax corruption,as well as judicial determinants.A GMM technique is applied to investigate the impact of the variables on tax corruption due to the possibility of an endogeneity problem.
The regressionfindings support the existence of a strong link between tax corruption and the indicators of tax complexity.After obtaining the estimated coefficients,different simulations are run to understand the economic significance of the tax simplification variables on tax corruption.The results show that while a 10%drop in the number of tax payments leads to an approximately4%cut in tax corruption,the same amount of decrea in the hours to comply with tax requirements reduces tax corruption by6%.The combined effects of the two tax simplification variables(10%cuts in both variables)are predicted to be even stronger,leading to a9.6%cut in tax corruption.To check for robustness,regional differences and the income level of countries are controlled.
3For example,Tanzi and Davoodi(2002)studies corruption,growth,and publicfinances;Friedman et al. (2000)studies determinants of unofficial activity in69countries;Crandall and Bodin(2005)and Imam and Jacobs(2007)focus on the effect of corruption on tax revenues;Purohit(2007)studies corruption in tax administration;Fisman and Gatti(2006)study the link between time spent with bureaucrats and bribes paid,using afirm level survey carried out in1999and2000across61countries;and Wang and Alvi (2011)show corruption lowers government performance.
柘皋古镇4Some papers on the impact of complex tax systems on tax cost:Heyndels and Smolders(1995);Cuccia and Carnes(2001);Evans(2003);Dean(2005);Mulder et al.(2009);Saad(2009);Alm(1999);Paul (1997);Oliver and Bartley(2005);Quandt(1983);Alm et al.(1992);Picciotto(2007).Some studies on how tax complexity may lead to lower taxes:Milliron(1985);Mills(1996);Spilker et al.(1999);Forest and Sheffrin(2002);Kirchler et al.(2006);Richardson(2006);Slemrod(2007).There are some controversial studies,indicating that tax complexity may lead to higher taxes:Scotchmer(1989);White et al.(1990).
Wefind that tax corruption responds more to the changes in the tax simplification variables in the Latin America and Caribbean and Sub-Saharan African regions. Similarly,a stronger positive link is obrved between tax corruption and tax simplification for lower-income countries.The empirical res
ults,indicating that tax simplification has a strong impact on tax corruption,have important policy implications.Lowering corruption in tax administration is possible by simplifying the tax regime,often in various easy,non-controversial ways,many of which do not even need legislative changes.The paper attempts to provide a road map for tax simplification;steps that can be taken both in tax laws and tax administration which would move a tax administration towards simplification,and hence on a path of lower tax corruption.
Section2gives information on the measurement of the tax corruption variable,as well as the indicators of tax complexity.Section3focus on regression analys and simulations.Section4prents some policy implications of the empirical results and includes suggestions on how to simplify taxes.Section5concludes.
2Tax simplification and tax corruption:data issues
2.1Measuring tax simplicity
As the intuitive analysis tells us,a simpler tax system creates fewer chances for rent eking and lowers the opportunity for corruption in the tax system.The question aris,how does one define‘‘tax simplicity’’,particularly in a way that would allow comparisons on an international level and across a ti
me period?The only viable option available is to u the doing business reports produced by the World Bank Group.The DB reports measure the ea of doing business as reflected in10 indicators,including one on complying with the tax system:paying taxes.Two sub-indicators of the paying taxes indicator are:time to comply and number of payments.The premi is that the lower the time taken to comply with the tax system and the fewer the number of payments,the easier it is for business to comply with their tax paying obligations.Bad on the definitions of the sub-indicators and the methodology of collecting data around them,it appears that for the purpos of this paper,the sub-indicators,Time to Comply(TAXTIME)and Number of Payments(TAXPAY),are the best suited measures of‘‘tax simplicity.’’5 It may be noted that the two variables are also ud to measure the complexity of tax systems by Lawless(2013).That paper investigates the impacts of changing tax complexity on foreign direct investmentflows.
The TAXTIME indicator measures the time it takes to prepare andfile tax returns for the three major taxes that impact an average medium-sized business,and the time taken to make the payments of the taxes.The preparation time includes the time taken to collect all information and data needed to calculate the tax liability and tofill out the declaration forms.If the tax regime has complex provisions which 5The definitions and methodologies are provided at www.doingbusiness/methodology/paying-taxes.
impo requirements to provide information that may not be available to a business in the normal cour of carrying on its business,or in its usualfinancial accounting, this adds to the time taken to comply.Finally,the time taken to actually complete declaration forms is also included,and so is the time taken to make the payments.If the declaration forms are complex,long,and tedious,that would result in a higher time to comply.And if payment procedures are inconvenient and not streamlined, time to comply increas.All of the rai compliance costs for taxpayers.This provides business with the incentives to accede to rent-eking tax officials who may be able to help cut down on the time and cost of taxfiling and payments in return for an appropriate rent.This reprents one link between tax complexity and tax corruption.
Secondly,if the tax laws contain provisions that provide special tax concessions or exemptions bad on a business fulfilling certain conditions,such as,maintaining special documentation or accounts to comply with the tax regime,and avail tho concessions,the extra time that it requires is also factored in.This not only increas the time to comply,but it can also lead to tax corruption in that the concessions are wrongly claimed,the provisions are deliberately misud,fal claims are made, and incorrect documents submitted,in collusion with some corrupt officials.Thus,a complex regime has the potential to engender rent-eking behavior,and time to comply is a good proxy of the complexity or simplicity of the tax regime.
Similarly,TAXPAY is a good measure of the ea of payment procedures of taxes.In inefficient tax administrations,taxpayers often face onerous payment procedures,have limited options in terms of where the payments can be made,and may have to stand in long lines to submit their tax payments.The DB methodology captures all this,and in addition,it factors in the benefits of electronicfiling and payments.In fact,the DB methodology assigns a higher weight to e-filing and e-payment systems:where the systems are widely prevalent,it assumes only one payment,even though business may make more frequent payments.Therefore,it implicitly assumes that e-filing and e-payment systems significantly reduce compliance burdens.Electronic tax systems thus get a disproportionately high weight,and rightly so.It is en around the world that successfully operating e-systems have been extremely uful to tax administrations in reducing tax compliance time and cost for tax payers and direct contact between taxpayers and tax officials.So,the doing business’s paying taxes sub-indicator is also uful in judging a tax system’s simplicity.
Bad on this reasoning,the two sub-indicators are chon as working definitions of tax simplicity.As the data analysis shows in the following ctions,while each of the indicators by themlves have a positive relationship with tax corruption, jointly they further strengthen the relationship.
It should be noted that the DB indicators have been criticized as they are not considered the most ro
bust of measures,especially in the ca of the paying taxes indicators.The methodology and the prentation of the data collected have also been questioned.However,the point is,they are the only available t of data points that provide an objective,world-wide comparison of indicators of the complexity or simplicity of tax regimes.
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