Taxation and corruption: theory and firm-level evidence from Uganda

  • Gauthier B
  • Goyette J
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This article develops a simple framework to analyse the negotiation over
bribe and tax payments during the tax collection process. We show that
the larger the bribe a firm offers to a tax collector, the larger the
tax rebate it gets. More particularly, we show that the negotiation over
bribe and tax payments hinges on four other factors: firms' official
liabilities, detection, firms' negotiation power and red tape costs
imposed on firms. Some of the predictions from the theoretical model are
tested using firm-level data from Uganda. We find that bribe and tax
payments are inversely related, thereby supporting the hypothesis of a
negotiation taking place between firms and tax collectors. In
particular, a 1% point increase in average bribe payments per employee
is associated with a 7% point reduction in average amount of tax
payments per employee. Results are robust to various instruments dealing
with the endogenous relationship between bribes and taxes.

Author-supplied keywords

  • bargaining power
  • corruption
  • red tape
  • tax administration
  • tax evasion

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