Doğuş Üniversitesi Dergisi, 7 (2) 2

Doğuş Üniversitesi Dergisi, 7 (2) 2006, 141-149
CORRUPTION AND TAX EVASION
YOLSUZLUK VE VERGİ KAÇAKÇILIĞI
Sacit Hadi AKDEDE
Adnan Menderes University,
Faculty of Economics and Administrative Sciences
ABSTRACT: Corruption and tax evasion problems have been investigated
separately before. Tax evasion is also considered to be a corrupt behavior itself.
However, in this paper, corruption is taken to be a bribe taken by a government
official and tax evasion is defined as an illegal act to avoid paying taxes by violating
tax laws. An interesting research question would be to see whether corruption can
induce tax evasion in individuals ? It is found in the paper that the size of bribe can
negatively affect tax evasion. It is shown that when a bribe is sufficiently large,
taxpayers prefer to pay their taxes voluntarily, not to evade taxes.
Keywords: Corruption, Tax Evasion.
ÖZET: Yolsuzluk ve vergi kaçakçılığı sorunları literatürde daha önce ayrı ayrı
incelendi. Vergi kaçakçılığı da bir yolsuzluk olsa da, bu makalede yolsuzluk devlet
memurunun rüşvet alması ve vergi kaçakçılığı da mükellefin yasalara aykırı
davranarak ödemesi gereken vergiyi ödememesi olarak tanımlanmıştır. Bu makalede
yolsuzluğun vergi kaçakçılığını özendirip özendirmeyeceği teorik olarak
araştırılmaktadır. Teorik model, istenen rüşvetin yüksek olması durumunda vergi
mükellefinin vergi kaçırmayacağını matematiksel olarak göstermektedir.
Anahtar Kelimeler: Yolsuzluk, Vergi Kaçakçılığı .
1. Introduction
Corruption is an old problem. As long as human beings are on the face of the earth,
it will be a persistent problem too. I will define corruption here as an illegal activity
of a government official to gain a personal benefit. Even though it is an old problem,
it is a relatively fresh investigation area for economists. Tax evasion is also an old
problem too; people don’t want to pay taxes if they find a way to do so. Tax evasion
is defined as an illegal act to avoid paying taxes by violating tax laws. So at first
glance, corruption seems to be a problem of only governments and government
officials, whereas tax evasion is a problem of private individuals. Their broad
definitions (corruption in the private sector and among individuals) which I will not
touch, however, prove otherwise. In the economic literature, both problems have
been addressed separately in depth. Their combined studies, however, remain to
deserve further empirical and theoretical analysis.
Corruption, in the existing literature, is modeled in many different ways. Some
studies claim that corruption might improve efficiency and help growth. Economists
have shown that, in the second best world when there are pre-existing policy induced
distortions, additional distortions in the form of smuggling, black marketing, etc.
may actually improve welfare even when some resources have to be spent in such
activities (Bardhan, 1997). Bardhan (1997) quotes Nathaniel H. Leff (1964) as “if
142 Sacit Hadi AKDEDE
the government has erred in its decision, the course made possible by corruption
may well be better the one”.
Another efficiency argument in favor of corruption is to look upon it as “speed
money”, which reduces delay in moving files in administrative offices and in getting
ahead in slowing queues for public services. These models allow the possibility for
the corrupt bureaucrat to practice discrimination among clients with different time
preference (Bardhan, 1997).
In most of the literature, however, corruption is seen to create inefficiencies. Mauro
(1995) showed that corruption is found to lower investment, thereby lowering
economic growth. Shleifer and Vishny (1993) argue that corruption would tend to
lower economic growth, and Rose-Ackerman (1978) warns of the difficulty of
limiting corruption to areas in which it might be economically desirable. Murphy,
Shleifer, and Vishny (1991) argue that countries where talented people are allocated
to rent seeking activities tend to grow more slowly. In the present paper, the growth
effects of corruption and tax evasion will not be discussed per se. Efficiency and
distributive effects, however, will be very apparent. As will be explained in the
following pages, the understanding of corruption, in this paper, is different from that
of existing literature: the government official is not selling a publicly provided
private good with a bribe added to official price, instead he is stealing the tax money
of private individual with the knowledge of that private individual.
Most models of corruption used the principal-agent framework as a tool to study it
(Rose-Ackerman, 1975, 1978, Klitgaard 1988, 1991). Most others, however,
assumed that the principal-agent framework is given (Shleifer and Vishny, 1993,
Benarjee, 1997) and extended the model to emphasize a specific point that is
considered to be important by particular authors. For example, Sheleifer and Vishny
(1993) look at the corruption with and without theft of government good, accepting
a priori that the principal-agent framework is in work. They also look at “the
industrial organization of corruption” and conclude that corruption is higher if
government offices provide the public good independently, meaning each of them
are behaving like a profit maximizing monopolist separately as opposed to
centralization of government offices.
Tax evasion is (has been) being studied intensively in the literature. Allingham and
Sandmo (1972), and Kolm (1973) are excellent survey studies about tax evasion.
Alligham and Sandmo (1972) claim that the tax declaration decision is a decision
under uncertainty and assume that the tax-payer’s behavior conforms to the Von
Neumann-Morgenstern axioms for behavior under uncertainty. And they maximize
the expected utility of the representative tax-payer, taking into account optimal tax
evasion under uncertainty and risk. Their comparative results state that an increase
in the penalty rate will always increase the fraction of actual income declared and
that an increase in the probability of detection will always lead to a larger income
being declared. Srinivasan (1973) uses the same type of model to study tax evasion.
Unlike the Allingham and Sandmo model, this model uses expected income as an
objective function to maximize, taking into account tax evasion and risk of it
(penalty). The results of both models, however, are remarkably similar: the optimal
proportion by which income is understated decreases as the probability of detection
increases.
Corruption and Tax Evasion 143
As can be seen from the summary above, corruption and tax evasion models look at
the problem from their own perspectives. Corruption models don’t take account the
fact that individuals can be induced to evade taxes when, say, bribery exists among
tax collectors, a government official, and conduct the analysis in the absence of
government corruption. Tax evasion itself can be considered a corrupt activity and
corruption can include tax evasion conceptually. In this paper, however, corruption
is taken to be a bribe taken by a government official. An interesting research
question would be to see whether corruption can induce tax evasion in individuals,
and whether the government’s effort to prevent both evasion and corruption can be
viable. The problem can be investigated from several different perspectives. On the
same line of research would be to look at the determinants of wage structure among
the government officials and try to find the determinants of bribery. My intuition for
that if the detection probability is sufficiently low and bribery is an expected activity
in the society (low expectation for getting punished for bribery), some government
official will find it optimal to take bribes even if they get paid efficient wages, well
above their reservations wages. One interesting study on this line is McLaren
(1996). In that paper, McLaren looks at the fiscal corruption among government
officials and observes that the firm chooses its level of compliance with the
regulation (this can be taken compliance with the tax code); simultaneously the
inspector chooses his level of effort. If the latter catches the formers violation, the
inspector can report it, causing the firm to be fined, and receives a fraction of the
fine as a commission; if it is more profitable to collude with the firm, the inspector
reports no violation, and splits the saving with the firm. If collusion occurs, there is
some probability that it will be discovered and an extra fine charged to the firm and
the inspector fired. It is clear in this setting that a rise in civil service compensation
can have a perverse effect on civil service performance, if corruption is occurring in
equilibrium. A rise in the inspector’s salary is like a rise in his fine for bribery, since
that is what he will lose if he is caught and fired. Thus, a rise in his salary makes it
less profitable, in expectation, to take a bribe; but in an equilibrium with corruption,
unless the salary goes up far enough to make the inspector give up on bribery
altogether, the bribe is his return to effort; thus, his inspection effort rationally drops.
Paying a corrupt civil servant high wages actually induces “sloth”. It may either
raise or lower firm compliance; if the inspector does catch a violation, he will
require a bribe higher, to compensate him for the higher risk. But because he is not
trying very hard, it is less likely that he will catch a violation. The net effects on the
firm’s incentives are ambiguous.
In another paper by Besley and McLaren (1993), the problem of inspector effort is
assumed away, but the government faces an additional complication: although tax
inspectors may have an incentive to collude with taxpayers to conceal taxable
income, not all potential tax inspectors have the inclination. Some may well be
predisposed to honesty and not willing to accept a bribe at any price. Ideally the
gover