Tax Structure and Corruption: Cross-Country Evidence

The determinants of corruption have long been an important subject for research in the fields of economics and political science. The literature has identified a wide range of factors that cause corruption; however, little research has been done on how the design of government policy influences corruption. We advance a new factor, the tax structure being measured as both tax mix and tax complexity, as another potential cause of corruption, and present strong supporting evidence by using a large sample of countries over the period 1995-2009. Our findings indicate that: (1) countries relying more heavily on direct taxes tend to enjoy a lower level of corruption, as opposed to countries with higher reliance on indirect taxes; and (2) countries with more complex tax systems tend to have a higher level of corruption, as opposed to countries with less complex tax systems. These results are robust across alternative measures of corruption and tax structure, and alternative estimations with and without correcting the potential endogeneity issue of the tax structure variables.