Corruption, governance and tax revenues in Africa

• Authors: Epaphra Manamba , Massawe
• Languages of publication: EN

Abstracts

EN

In this paper we analyze the effects of institutional variables (corruption and governance), structural variables (per capita income, trade openness, inflation and share of agriculture in GDP), and policy variables (tax rate and tariff rate) on total tax revenues, direct taxes, indirect taxes and trade taxes using panel data set for 30 African countries over the 1996-2016 period. All estimates are based on fixed effects (FE) and random effects (RE) models. Using Hausman test, RE is earmarked to be the more preferred model in this paper. The RE regression results show that corruption and governance are two main determinants of tax revenues in Africa. While corruption has a significant negative effect on tax revenues, good governance measured in terms of government effectiveness, regulatory quality, rule of law and voice and accountability tends to raise tax revenue generation and in particular, indirect taxes. In the same vein, governance in form of political stability tends to have a very significant effect on direct taxes and international trade taxes. The basic intuition behind these results is that higher institutional capacity and lower corruption enhance tax revenue generation in the economy. Intriguingly, empirical results show that tariff rates tend to have a strong negative effect on total tax revenue but at the same time they have a strong positive effect on trade tax revenue. Moreover, trade openness tends to have a strong positive relationship with tax revenue. Overall, results suggest that to raise more tax revenue, governments should reduce corruption, improve tax and customs administration and raise revenues from tax categories that are less susceptible to corruption. They should as well enhance trade openness.

Keywords

EN

Tax revenue; corruption; governance; institution; panel data

Discipline

• ECONOMICS: ECONOMICS

• Publisher: Prague Development Center, Czech Republic
• Journal: Business and Economic Horizons
• Year: 2017
• Volume: Volume 13
• Issue: Issue 4
• Pages: 439-467

Dates

published

2017-10-12

Contributors

author

Epaphra Manamba

• Department of Accounting and Finance, Institute of Accountancy Arusha, Tanzania

author

Massawe

• Department of Accounting and Finance, Institute of Accountancy Arusha, Tanzania

References

• Abed, G. T., & Davoodi, H. R. (2002). The economics of corruption: An overview, in G. T. Abed, & S. Gupta (Eds.), Governance, corruption and economic performance (pp. 1-16). Washington, DC: IMF.
• Agbeyegbe, T., Stotsky, J. G., & WoldeMariam, A. (2004). Trade liberalization, exchange rate changes, and tax revenue in sub-Saharan Africa (IMF Working Paper, WP/04/178). Washington, DC: IMF.
• Aizenman, J. & Jinjarak, Y. (2008). The collection efficiency of the value added tax: theory and international evidence. Journal of International Trade and Economic Development, 17(3), 391-410. https://doi.org/10.1080/09638190802137059
• Ajaz, T., & Ahmad, E. (2010). The effects of corruption and governance on tax revenues. The Pakistan Development Review, 49(4), 405-417.
• Allison, P. D. (2009). Fixed effects regression models. London: Sage. https://doi.org/10.4135/9781412993869
• Alm, J., & Martinez-Vazquez, J. (2003). Institutions, paradigms, and tax evasion in developing and transition countries. In J. Martinez-Vazquez, & J. Alm (Eds.), Public Finance in Developing and Transition Countries (pp. 146-176.). Essays in the Honor of Richard Bird. Cheltenham, UK: Edward Elgar.
• Attila G. (2008). Corruption, taxation and economic growth: theory and evidence. Etudes et Documents E 2008.29. Clermont: Clermont Université, Université de Clermont I, CERDI-CNRS.
• Bahl, R. W. (1971). A regression approach to tax effort and tax ratio analysis (IMF Staff Paper, 18, 570-612). Washington, DC: IMF. https://doi.org/10.2307/3866315
• Begum, L. (2007). A panel study on tax effort and tax buoyancy with special reference to Bangladesh (IMF Working Paper 07/15). Washington, DC: IMF.
• Bird, R. M., Martinez-Vazquez, J., & Torgler, B. (2004). Societal institutions and tax effort in developing countries (International Center for Public Policy Working Paper 04-06). International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
• Chelliah, R. J. (1971). Trends in taxation in developing countries (IMF Staff Papers, 18, 254-332). Washington, DC: IMF. https://doi.org/10.2307/3866272
• Cukierman, A., Edwards, S., & Tabellini, G. (1992). Seigniorage and political instability. American Economic Review, 82(3), 537-555.
• Djumashev, R. (2007). Corruption, uncertainty and growth (Discussion Paper 15/07), Department of Economics, Monash University.
• Dos Santos, P.S. (1995). Corruption in tax administration. Presented at the 29th Annual Assembly of the Inter-American Center of Tax Administrators (CIAT), Lima, Peru, March 29, 1995.
• Dreher, A., & Herzfeld, T. (2005). The economic costs of corruption: A survey and new evidence. Working Paper 0506001, Public Economics, EconWPA.
• Epaphra, M., & Massawe, J. (2017). The effect of corruption on foreign direct investment: A panel data study. Turkish Economic Review, 4(1), 19-54.
• Everest-Phillips, M., & Sandall, R. (2009). Linking business tax reform with governance: How to measure success. Investment climate in practice; No. 2. Business taxation note. Washington, DC: World Bank.
• Fjeldstad, O.-H., & Tungodden, B. (2003). Fiscal corruption: A vice or a virtue?. World Development, 31(8), 1459-1467. https://doi.org/10.1016/S0305-750X(03)00089-5
• Fjeldstad, O-H. (2005). Revenue administration and corruption. U4 Utstein Anti-Corruption Resource Centre, Chr. Michaelson Institute, Bergen, Norway.http://partner.u4.no.
• Gaalya, M. S. (2015). Trade liberalization and tax revenue performance in Uganda. Modern Economy, 6, 228-244. https://doi.org/10.4236/me.2015.62021
• Ghosh S., & Neanidis K. C. (2010). Corruption in public finances, and the effects on inflation, taxation, and growth (Working Paper No. 10-14, 1-32). Brunel University London.
• Ghura, D. (1998). Tax revenue in sub-Saharan Africa: Effects of economic policies and corruption. (IMF Working Paper 98/135). Washington DC: IMF.
• Greene, W. H. (2012). Econometric Analysis, 7th ed. Harlow: Pearson.
• Gupta, S. (2007). Determinants of tax revenue efforts in developing countries (IMF Working Paper 07/184). Washington DC: IMF.
• Gupta, S., Davoodi, H. R., & Alonso-Terme, R. (2002). Corruption and the provision of health care and education services. In G. T. Abed, & S. Gupta (Eds.), Governance, corruption and economic performance. Washington DC: IMF.
• Hausman, A. J. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251-1271. https://doi.org/10.2307/1913827
• Imam, P. A., & Jacobs, D. F. (2007). Effect of corruption on tax revenues in the Middle East. (IMF Working Paper No.07/270). Washington DC: IMF.
• Joulfaian, D. (2009). Bribes and business tax evasion. The European Journal of Comparative Economics, 6(2), 227-244.
• Kar, D., & LeBlanc, B. (2013). Illicit financial flows from developing countries: 2002-2011. Global Financial Integrity, Financial Transparency Coalition.
• Keen, M. (2003). Changing customs: challenges and strategies for the reform of customs administrations. International Monetary Fund, Washington DC: IMF.
• Keen, M., & Simone, A. (2004). Tax policy in developing countries: some lessons from the 1990s, and some challenges ahead. In S. Gupta, B. Clements, and G. Inchauste (Eds.): Helping countries develop: the role of the fiscal policy. Washington DC: IMF.
• Leuthold, J. H. (1991). Tax shares in developing countries: a panel study. Journal of Development Economics, 35(1), 173-185. https://doi.org/10.1016/0304-3878(91)90072-4
• Mascagni, G., Moore, M., & McCluskey, R. (2014). Tax revenue mobilization in developing countries: issues and challenges. European Parliament, Directorate-General for External Policies, Policy Department, EXPO/B/DEVE/2013/35
• Melo, M. A. (2007). Institutional weakness and the puzzle of Argentina's low taxation. Latin American Politics and Society, 49(4), 115-148. https://doi.org/10.1353/lap.2007.0040
• Nawaz, F. (2010). Exploring the relationships between corruption and tax revenue. U4 Anti-Corruption Resource Centre, CMI.
• Sanyal, A., Gang, I. N., & Goswami, O. (2000). Corruption, tax evasion and the Laffer curve. Public Choice, 105(1-2), 61-78. https://doi.org/10.1023/A:1005105822911
• Stotsky, J. G., & WoldeMariam, A. (1997). Tax effort in sub-Saharan Africa. (IMF WP/97/107 73). Washington DC: IMF. https://doi.org/10.5089/9781451852943.001
• Tanzi, V. (1978). Inflation, real tax revenue, and the case for inflationary finance: Theory with an application to Argentina. (IMF Staff Papers, 25(3), 417-451). Washington DC: IMF. https://doi.org/10.2307/3866679
• Tanzi, V. (1987). Quantitative characteristics of the tax system of developing countries. the theory of taxation for developing countries. New York: Oxford University Press.
• Tanzi, V. (1989). The impact of macroeconomic policies on the level of taxation and the fiscal balance in developing countries (IMF Staff Papers, 36(3), 633-656). Washington DC: IMF. https://doi.org/10.2307/3867050
• Tanzi, V. (1992). Fiscal policies in economies in transition. Edited Edition. IMF, Washington DC: International Monetary Fund.
• Tanzi, V. (1998). Corruption around the world: causes, consequences, scope, and cures (IMF Working Paper No. 63). Washington DC: IMF.
• Tanzi, V., & Davoodi, H. R. (2000). Corruption, growth and public finances (IMF Working Paper 00/182). Washington DC: IMF.
• Tanzi, V. and Zee, H. (2000). Tax policy for emerging markets: developing countries (IMF Working Paper WP/00/35). Washington DC.
• Teera, J. M. (2003). Could do better: An appraisal of Uganda's tax performance relative to sub-Saharan Africa (Working Paper, University of Bath).
• Thornton, J. (2008). Corruption and the composition of tax revenue in Middle East and African economies. South African Journal of Economics, 76(2), 316-320. https://doi.org/10.1111/j.1813-6982.2008.00176.x
• Torgler, B. (2004). Tax morale, trust and corruption: Empirical evidence from transition countries ( CREMA Working Paper No. 2004-05). Center for Research in Economics, Management and the Arts, Basel.
• Tupy, M. L. (2005). Trade liberalization and poverty reduction in sub-Saharan Africa. Policy Analysis, 557, 1-23, Cato Institute.
• Van Rijckeghem, C., & Weder, B. (2002). Bureaucratic corruption and the rate of temptation: do wages in the civil service affect corruption and by how much? In G. T. Abed and S. Gupta (Eds.), Governance, Corruption and Economic Performance (pp. 59-88). Washington DC: IMF.
• Volkerink, B., & De Haan, J. (1999). Political and institutional determinants of the tax mix: An empirical investigation for OECD countries. Research Report, from University of Groningen, Research Institute SOM: Systems, Organizations and Management, No. 99E05.
• Weiss, S. J. (1969). Factors affecting the government revenue share in less developed countries. Social and Economic Research, 18(4), 348-364.
• Wooldridge, J. M. (2002). Econometric analysis of cross section and panel data. Cambridge, MA: MIT Press.
• World Bank (2017). World Development Indicators. Washington, DC: World Bank