Does corruption cause tax evasion? Evidence from an emerging economy
| Published date | 07 May 2019 |
| Pages | 217-232 |
| DOI | https://doi.org/10.1108/JMLC-01-2018-0001 |
| Date | 07 May 2019 |
| Author | John Kwaku Amoh,Abdallah Ali-Nakyea |
Does corruption cause tax
evasion? Evidence from an
emerging economy
John Kwaku Amoh
Department of Accounting, Faculty of Accounting and Finance,
University of Professional Studies, Accra, Ghana, and
Abdallah Ali-Nakyea
Faculty of Law, Ghana Institute of Management and Public Administration,
Achimota, Accra, Ghana and School of Law, University of Ghana, Legon, Ghana
Abstract
Purpose –The purpose of this study is to examine the corruption-tax evasion nexus and to establish the
strengthof relationships among corrupting activities.
Design/methodology/approach –The research applied structuralequation modelling on selected data
from the World Economic ForumExecutive Opinion Survey on corruption activities and data on tax evasion
triggeringfactors from the World Development Indicators and the Bank of Ghana to test two hypotheses.
Findings –The test of the first hypothesis suggests that corrupting activities significantly cause tax-
evading activitiesin Ghana; hence, there is at least one corrupting activitytriggering tax evasion. Testing the
second hypothesis revealed that corruption in Ghana exhibits all of the five dimensions of corruption that
were examined.Hence, there is correlation among the corrupting activities.
Research limitations/implications –The research is limited by the availability of data; hence, only
data for selectedvariables for the period were examined.
Practical implications –The results are indicative that most emerging economies tend to have more
than one typeof dominating corruption dimension, which are tax-evadingtriggers.
Originality/value –The study extends the literatureby examining the various dimensions of corruption,
analysing the strength of theirrelationships and how they impact tax evasion in an emergingeconomy. By
identifying and employing specificcorrupting activities, there is a better understanding and appreciation of
the corruption-taxevasion nexus in the revenue generation process. This may aid emerging economies in the
drafting of tax evasion and corruption reduction policies/programmes to ensure the achievement of
sustainabledevelopment goals.
Keywords Ghana, Economy, Tax evasion, Corruption, Structural, Modelling, Emerging,
Sustainable development
Paper type Research paper
1. Introduction
The discussion of the relevance of tax revenues to emerging economies is pivotal to the
realisation of their dreams of achieving accelerated economic progress (Kaldor, 1963).
Consequently, Kaldor asked, “Will under-developed countries learn to tax?”Generating
adequate tax revenues is thus critical to the realisation of sustainable development goals
(SDGs).
In sub-Saharan Africa, although tax revenues account for the bulk of their public
revenues, the majority of African countries do not generate enough to cover actual
government expenditure. In 2016, Ghana’s tax revenue was 76.27 per cent of government’s
Does
corruption
cause tax
evasion?
217
Journalof Money Laundering
Control
Vol.22 No. 2, 2019
pp. 217-232
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-01-2018-0001
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm
total revenue. Tax revenue/GDP ratio was 15.2 per cent, which was about half of the total
government expenditure/GDP ratio of 30.3 per cent for the same period (Bank of Ghana,
2016). Moreover, the discoveryof oil in Ghana in 2007, which raised many hopes, has not yet
had a significant impact on domestic revenues[1]. Therefore, there is the urgent need in
many emerging economies to relook at their tax revenue generation strategies, revenue
leakage reductionstrategies and other policies if their SDGs would ever be achieved.
Currently, there is an awareness in domestic revenue mobilisation in many emerging
economies (AfDB, 2010;IMF, 2011;Drummond et al.,2012), which was foremost on the list
of action areas in the outcome document that emerged from the third Financing for
Development conferenceheld in Addis Ababa in July 2015 (UN, 2015). However, tax evasion
is a major concernthat seems to undermine these efforts and initiatives.
Benk et al. (2015) defined tax evasion as, “an illegalact or practice of failing to pay taxes
which are owed to the state”.Alleyne and Terry (2017) noted that tax evasion is a major
challenge for governments the world over, with innovative and ever-changing schemes,
which makes it increasinglydifficult to regulate.
In 2017, the Global Financial Integrity (GFI)[2] estimated that every year, about $1tn
flows illegally out of developing and emerging economies because of crime, corruption and
tax evasion, which is more than what these countries receive via both foreign direct
investment (FDI) and foreignaid.
Consequently, this has left many emerging economies in fiscal deficits and is the main
reason why they borrow money that puts further pressure on their already fragile
developing economies(Alleyne and Terry, 2017).
Hence, addressing tax evasion is vitalto emerging economies if public services are to be
well preserved and economic goalsare to be realised. Extant literaturehas identified several
factors that triggertax evasion, such as high tax burden, unemployment, urbanisation,trade
openness and inflation(Vousinas, 2017;Tabandeh et al.,2012).
From the GFI 2017 report, the other issue of equal debilitating importance is corruption.
Corruption is said to be legally wrong, morally wrong and economically indecent (Ertimi
and Saeh, 2013). Corruption has been around since the dawn of civilisation, and the
commencement of commerce and its negative impact on economies cannot be over-
emphasised. Unarguably, the dimension of corrupting activities to be included in an overall
classification of corruptionis quite large.
Anderson (2015) used five dimensionsof corruption, i.e. diversion of public funds, ethical
behaviour of firms, favouritism in decisions by government officials, organised crime and
irregular payments and bribes, in his study on corrupting activities and economic
development.
Owing to the above phenomena of tax evasion and corrupting activities, emerging
economies are confronted with limited public revenues. This has forced some of them to
explore noveltax evasion reduction strategieswithout decisively dealingwith the corruption
issue, whichseems to be a trigger of tax evading activitiesin the revenue generation process.
Most prior literature has examined tax evasion as a crime or corrupting activity
(Rosenmerkel, 2001; Saracoglu,2008; Bergman, 2009;Benk et al.,2015); however, the impact
of corruption on taxation and hence economic development was not considered in the
historical development of economic theories because according to Volejníková (2009),
corruption was not perceivedas an economic problem.
Although some researchersstudying corruption are of the view that corruption can be an
efficiency-enhancing force in tax revenue collection by motivating tax officers to work
harder and dis-incentivisingtax evasion, other researchers have posited that the presence of
corruption reduces tax revenuesin the long run (Fjeldstad and Tungodden, 2001).
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