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October 31, 2007

Corruption and Tax Revenue Generating Capacity Draft Paper

Posted by Davina Jacobs

A draft paper by Davina Jacobs and Patrick Imam, "Effect of Corruption on Tax Revenues in the Middle East" focusing on the impact of corruption on tax revenue performance was discussed at the International Institute of Public Finance (IIPF) 63rd Congress, in Warwick, U.K. (see October 10 blog post) This is the first study that estimates the impact of corruption on the revenue generating capacity of different taxes in the Middle East. We find that the low revenue collection as a share of GDP in the Middle East compared to other middle-income regions is due in part to corruption.

[Click here to download the paper Download iipf63261..pdf]

Certain taxes are, however, more affected by corruption than others. Taxes requiring frequent interactions between the tax authority and individuals, such as taxes on international trade, seem to be more affected by corruption than most other forms 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 reduce corruption, or alternatively, raise revenues from taxes that are less susceptible to corruption. Reforms of tax administration that minimize opportunities for corruption are therefore critical for raising tax ratios.

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