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The Impact of Corruption on Firm Tax Compliance in Transition Economies: Whom Do You Trust?

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Abstract

Tax compliance is an important issue for governments and the public alike. To meet public needs and fund public mandates, firms around the world are expected to comply with tax laws. Factors that are related to organizational (firm) tax compliance have not been sufficiently examined in the literature. Owing to the increasing global influence of transition economies, factors associated with firm tax compliance in transition economies are particularly of interest. Based on a sample of over 5,000 firms from 22 former Soviet Bloc transition economies, we find that higher levels of corruption and higher levels of particularized trust (reliance on friends and family) are associated with lower levels of tax compliance. Interestingly, we also find that the negative relationship between corruption and tax compliance is weakened in situations of higher generalized trust (trust in strangers). Overall, our study’s results suggest that institutional factors play an important role and are related to firm tax compliance behavior in transition economies.

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Notes

  1. Transition economies are developing countries that are transitioning from centrally-planned to market-based economies, such as former Soviet Bloc countries (e.g., Russia, Ukraine, etc.).

  2. Institutionalization of corruption does not imply that the majority of citizens accept this behavior as ethical or appropriate; instead, institutionalized corruption is often systematic and extensive due to power differences. We thank an anonymous reviewer for highlighting this issue.

  3. We would like to thank an anonymous reviewer for highlighting this point.

  4. It is important to note that this relationship does not apply to circumstances when corruption becomes predatory, as “pure extortion that does not deliver value to either the briber or the society and, hence is detrimental to economic growth” (Li and Wu 2010, p. 136).

  5. Unlike maximum likelihood estimators, REML takes the number of parameters into account. Since the number of countries in the analysis (22) is fairly low, we use REML regression.

  6. We considered a multi-item measure that contains other measures of the infrastructure services, but as the measure does not demonstrate sufficient reliability, we follow Uslaner (2010) and use the one-item measure.

  7. The BEEPS Questionnaire did not include firms with more than 10,000 full-time employees.

  8. Interaction terms were not mean-centered, since research suggests that mean-centering of variables does not reduce multicollinearity (Echambadi and Hess 2007).

  9. Several sensitivity tests further assessed the robustness of the study’s findings. First, it is possible that a reduction in the level of tax compliance could cause more corruption activities, such that the study’s model could suffer from reverse causality (endogeneity). We conduct a Hausman test to test for the possibility of endogeneity between corruption and tax compliance. The Hausman test does not demonstrate that endogeneity is present in the study’s model, indicating that the causal inference presented in the model between corruption (as an independent variable) and tax compliance (as a dependent variable) is reasonable. Second, our study’s dependent variables are implicitly treated as continuous variables in the regression models; we conduct a sensitivity test to determine if this assumption biases the results. As an alternative analysis, we use a Tobit model to account for the fact that some possible models are censored (e.g., those below 0 or above 300 with the aggregated dependent variable measure or above 100 with the separate tax compliance measures). Results are virtually identical; thus, the presented mixed-effect regression models do not appear to be biased. Third, additional analyses considered the effect of gross domestic product (GDP) or gross national income (GNI) on tax compliance; results are unchanged, and neither variable approaches statistical significance.

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Acknowledgments

We appreciate the helpful feedback from participants at the 2011 ABO Research Conference (Amber Whisenhunt, discussant), 2011 Academy of International Business Southeast Conference, 2012 AAA Public Interest Section Meeting (Eileen Taylor, discussant), the European Accounting Association 2012 Congress and the workshop participants at the University of Central Florida.

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  1. Rollins College, 1000 Holt Avenue—2723, Winter Park, FL, 32789-4499, USA

    Anna Alon

  2. Department of Accounting, Kansas State University, Manhattan, KS, 66506, USA

    Amy M. Hageman

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  1. Anna Alon
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Correspondence to Amy M. Hageman.

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Alon, A., Hageman, A.M. The Impact of Corruption on Firm Tax Compliance in Transition Economies: Whom Do You Trust?. J Bus Ethics 116, 479–494 (2013). https://doi.org/10.1007/s10551-012-1457-5

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