Remittances, Control of Corruption and Taxation in Developing Countries

Mercredi | 2020-10-22
12h00 en B103


AbstractThis paper examines the impact of remittances on the tax effort of 91 developing countriesduring 2002-2017 using Stochastic Frontier Analysis (SFA). SFA makes a distinction betweenthe concepts of tax capacity (the optimum tax revenue a country can collect given its structuralfeatures) and tax effort (the ratio of actual tax revenue to tax capacity). The results indicate thatremittances increase tax effort in receiving countries and the strength of this relationship isundermined in highly corrupt countries. First, remittances are generally used for consumptionpurposes and thus expand revenue base through sales/VAT tax increasing tax effort. Second,corruptible tax administrations not only cause deficits through increased evasion by taxpayers -having administrators who request bribes in exchange for understated sales/VAT tax – but alsodivert some of the collected revenues from reaching the governments’ treasuries. Moreover,corruption weakens the quality of bureaucracy and trust in administrative processes therebyencouraging larger informal sectors which in turn erode governments’ revenue base. Havingappropriate measures to curb corruption will increase the effectiveness of remittances therebybuilding the much needed fiscal space.