Corruption, tax reform and fiscal space in emerging and developing economies

Abstract

Several studies have demonstrated that corruption hinders efforts in enhancing public revenue and fiscal space through different channels. This paper assesses the effect of tax reform on fiscal space conditional on corruption control for a large panel of developing and emerging economies from 1990 to 2016. Using a threshold approach, our findings indicate that the tax reform effect on fiscal space is not monotonic and depends on corruption control. Tax reform enhances fiscal space and tax revenue when corruption control is better. The results also suggest that heterogeneity across countries and time does matter. Individual estimates of the elasticity of fiscal space to tax reform support evidence that countries that benefit most from tax reform are those that prove enough ability to control corruption.