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The Impact of Bureaucracy PDF
The Impact of Bureaucracy PDF
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RAF
5,2
The impact of bureaucracy,
corruption and tax compliance
Ronald D. Picur and Ahmed Riahi-Belkaoui
College of Business Adminstration, University of Illinois at Chicago, IL, USA
174 Abstract
Purpose Tax compliance has been studied by analyzing the individual decision of a representative
person between planning and evading taxes. A neglected aspect of tax compliance is the impact of
bureaucracy and corruption. Both bureaucracy and corruption are hypothesized to have a negative
impact on tax compliance. Aims to examine this issue.
Design/methodology/approach Based on empirical evidence from 30 developed and developing
countries.
Findings Finds that tax compliance internationally is negatively related to the levels of
bureaucracy and positively related to the successful control of corruption. The paper shows that a
powerful deterrent is the creation of a tax morale or climate, where citizens are protected from
corruption and bloated burequcracies.
Originality/value The findings are of great value to developing countries that need to reduce both
the level of corruption and bureaucracy in order to create the type of tax morale conducive to both
tax compliance and economic development.
Keywords Bureaucracy, Corruption, Taxes
Paper type General review
1. Introduction
Why do individuals resist tax compliance with their tax commitments and why
does this situation differ internationally? The question has been extensively
researched from the theoretical perspectives of general deterrence theory, economic
deterrence models and fiscal psychology (Cuccia, 1994). This study takes the view that
the actions of governments can best explain the phenomenon of tax compliance
internationally. It shows that where governments reduce bureaucracy and increase the
control of corruption, tax compliance will be at its highest. It argues for an implicit
social contract where the government and/or the state create a tax environment
unburdened by the inefficiencies of bureaucracy, and corruption for tax compliance to
be effective. This is especially crucial for developing countries where economic
development can be drastically hampered by lower public revenues due to lack of tax
compliance.
Section II of the paper describes the relationship of bureaucracy, corruption, and tax
compliance. Section III describes the data. Section IV presents the regression analysis
and discussions, and Section V concludes.
3. Data
The determination of the sample rested on securing the necessary data on the variables
of interest specified in the main hypothesis of the paper. A total of 30 developed and
developing countries met this test. They are shown in Table I.
Table II summarizes all the variables. They are computed as follows:
(1) Tax compliance is measured by an assessment of the level of tax compliance that
varies from 0 to 6. Higher scores indicates higher compliance (La Porta et al.,
1999). The three highest scores are for Singapore (5.25), New Zealand (5.00) and
RAF Tax Control of
5,2 Name of country compliance Bureaucracy corruption
Australia (4.58). The three lowest scores are for Italy (1.77), Philippines (1.83), and
Sweden (1.91).
(2) Bureaucracy is measured by the percentage of government expenditures over
gross domestic product. Higher scores indicates higher bureaucracy. The three
highest bureaucracies are for Israel (47.8), France (46.2), and The Netherlands
(45.9).
(3) Corruption is measured by a control of corruption score obtained from Kaufman
et al. (2002). It measures perceptions of corruption, conventionally defined as the
exercise of public power for private gain. The scores are oriented so that higher
values correspond to better outcomes, in a scale from 2.5 to 2.5. A higher index
indicates lower corruption and higher control of corruption. It may be also
understood as the lack of corruption. The three highest scores are for Denmark
(2.12), Sweden (2.085), and Finland (2.084). The three lowest scores are for
Indonesia (0.79), Turkey (0.34), and Argentina (0.27).
Variable Description Source Bureaucracy,
corruption and
Tax compliance Assessment of the level of tax compliance. The Global Competitiveness tax compliance
Scale from 0 to 6 where higher scores Report 1996 as reported in
indicate higher compliance. Data is for 1995. La Porta et al. (1999)
La Porta et al. (1999)
Bureaucracy Percentage of tax government expenditures World Bank sources
over gross domestic product for 1991-95 177
Control of Control of corruption score. Scale from 2.5 Kaufman et al. (2002)
corruption to 2.5 where higher scores indicates lower
corruption
Note: This table describes the variables collected for the 30 countries included in our study. We Table II.
present the description and the sources from which each variable is collected The variables
where TCi is tax compliance score for country i (La Porta et al., 1999), GEGi is
Government expenditures over gross domestic product, CORi is Control of corruption
score for country i (Kaufman et al., 2002).
The results of the regression are presented in three columns of Table V.
Column 1 of Table V presents the result of regressing tax compliance against the
control of corruption score. As expected, the impact of control of corruption on tax
Notes: TC: Tax compliance score; GEGDP: Government expenditures over gross domestic Table III.
product; COR: Corruption score Descriptive statistics
TC GEGDP COR
5. Conclusions
This study examines the international differences in tax compliance and relates these
differences to selected determinants of tax morale. The findings of the empirical
investigation from 30 developed and developing countries indicate that tax compliance
is highest in the countries characterized by high control of corruption and low size of
bureaucracy. It shows that a powerful deterrent is the creation of a tax morale or
climate, where citizens are protected from corruption and bloated bureaucracies. This
is an important result for the developing countries where the lack of tax compliance Bureaucracy,
and the resulting low revenues can drastically hamper economic development. It is
very urgent for the developing countries to reduce both the corruption and the
corruption and
bureaucracy in order to create the type of tax morale conducive to both tax compliance tax compliance
and economic development.
This study is a levels study as opposed to a changes study. One could argue that
changes in tax compliance is sensitive to changes in bureaucracy and corruption in
addition to the levels of current bureaucracy and corruption. Future research that can 179
secure data on changes on tax compliance could include both forms of the variables,
levels and changes, in a replicated study.
This study may also acts as an anchor for examining the potentially correlated
omitted variables in this study. Examples may include: cultural differences regarding
tolerance to bureaucracy; cultural differences regarding tolerance to corruption; the
relation between the government and the population (democratic vs nondemocratic
regimes); differences in tax regimes that impact taxpayer compliance; differences in
national wealth that affect compliance; popularity of government with the population,
to name only a few. Future research needs to address the relevance of these and other
factors to the thesis of this study.
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Corresponding author
Ahmed Riahi-Belkaoui can be contacted at: belkaoui@uic.edu