Effect of Corruptionon Tax Revenues in the Middle East

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the authors and are published to elicit comments and to further debate.This study estimates the impact of corruption on the revenue-generating capacity of different tax categories in the Middle East. We find that the low revenue collection as a share of GDP there compared to other middle-income regions is due in part to corruption, and certain taxes are 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 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.

Shadow economy, corruption, and tax performance: A study of BRICS

“…Potanlar, Samimi, and Roshan (2010) justify this negative relation in 27 developing countries with the ground that country with corrupt government levies heavy taxes on international trade which surge tax evasion and tax collection cost. For Middle East countries, Imam and Jacobs (2007) find similar results as revenue collection decrease with an increase in corruption.…”

Economic freedom and tax revenue performance in sub-Saharan Africa

“…World Bank (1997) considers corruption as the misuse or abuse of public office by public employees for private gain. In the view of Imam and Jacobs (2007), institutional corruption is unlawful or unauthorized act involving public servant who uses his or her position to collect bribe directly or indirectly in exchange for providing benefit available to member of the public. Corruption comes in different forms including extortion, bribery, embezzlement, tribalism, nepotism and stealing from public treasury.…”

“…Corruption is a multidimensional problem (Imam and Jacobs, 2007) with multifaceted effects and consequences. Several factors have been identified as the causes of corruption.…”

“…Ene et al (2013) attribute corruption to discrimination in wealth distribution, greed and materialism as well as lack of transparency and accountability in government. With reference to taxation, Imam and Jacobs (2007) trace the causes of corruption in tax administration to complexity in tax system, high tax rate, lack of enforcement of tax sanction and low monetary incentive to revenue officers. By concentrating public resources illegally on small segment of the population, corruption has wide-ranging negative effects on the economy, governance quality, investment, public revenue.…”

“…The authors conclude that higher corruption consistently resulted in drop in revenue from different types of taxes except for non-tax revenue. In another study, Imam and Jacobs (2007) explore the effect of corruption on tax revenue in 12 Middle East countries in the period 1990 to 2003 and find that indirect taxes such as trade tax are significantly negatively affected by corruption than direct taxes. Similarly, a study of Thornton (2008) which covered 53 countries finds strong evidence indicating that corruption has a negative effect on domestic goods and services taxes as well as international trade taxes.…”