Which Fiscal Instruments Do Corrupt Governments Prefer During Fiscal Consolidation Episodes?

Abstract

This study investigates the fiscal policy choices of corrupt governments during periods of fiscal consolidation. By using the same dataset by Arin et al. (2011), our analysis of pooled observations for 18 OECD countries reveals two key findings: (i) corrupt governments tend to raise indirect taxes rather than reduce expenditures during fiscal adjustments, and (ii) they yield to political lobbying and pressure by lowering corporate taxes and increasing social benefits and subsidies during substantial fiscal adjustment episodes.