Taxation, Corruption and Economic Growth: A Causality Analysis of Developed and Developing Countries

Abstract

This study aimed to examine the impact of corruption on the relationship between taxation and economic growth. It sought to determine whether corruption acts as a moderating factor that disrupts the positive association between taxation and economic growth rate. To achieve these objectives, the study employed panel data for the year 1985-2016 of developed and developing countries. Additionally, the study employed causal analysis techniques to establish a deeper understanding of the causal relationships between taxation, corruption, and economic growth. This was followed by estimating a co-integration regression using the Dynamic Ordinary Least Squares (DOLS) method. The empirical results of DOLS show that taxation and corruption both are lubricating the wheel of economic growth for developed while for developing countries taxation is stimulating growth, but corruption sands the wheel of growth. Similarly, the indirect effect of taxation through the channel of corruption is also negative for both samples. Likewise, the impact of the square term of taxation is also negative. The VECM Granger causality test shows that bidirectional causality exists between all variables in the long run. During the causality analysis, it was found that in developing nations, there is unidirectional causality from economic growth rate to tax revenues and from corruption to taxation. In developed countries, unidirectional causality was observed from corruption to tax revenues. However, bidirectional feedback exists between economic growth rate and corruption in developing countries, and bidirectional causality exists between taxation, economic growth rate, and corruption in developed countries. The study also suggests policy implications based on these empirical findings to improve the situation of these factors.