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Data source: HS 1996 6-digit-based Comtrade database This figure shows the plot of the logarithm of export variety and the logarithm of IIT in 2012 for the electrical and optical equipment industry. IIT is measured as the bilateral trade between Japan and one of the twenty-five countries using Equation (10). The results confirm the theoretical model, especially Equation (12), since it demonstrates the positive correlation between the number of export varieties and IIT.
The value of exports data are taken from the Harmonized Commodity Description Coding System (HS) 1996 United Nations Commodity Trade Statistics Database (Comtrade database). China has the largest number of export varieties. Japan is the fourth largest among the twenty-six countries. Figure 2 shows the plot of the logarithm of export variety and the logarithm of IIT in 2012 for the electrical and optical equipment industry. IIT is measured as the bilateral trade between Japan and one of the twenty-five countries using Equation (10). The degree of IIT for each trading pair for the industry is calculated using the HS 1996 6-digit-based Comtrade database, which is the most detailed data available. The HS1996 6digit-based extent-of-IIT data for each pair of countries are aggregated into the industry weighted by trade values. Table 2 shows the results of the OLS estimation of the data in Figure 2. This paper simply regresses the logarithm of IIT on the logarithm of export variety. The estimated coefficient of ln IIT2012 is positive as expected, and is significantly different from zero at 1 percent level. Therefore, a one percent increase in the number of export varieties results in a 0.567 percent increase in the degree of IIT in 2012 for the electrical and optical equipment industry. The results of Figure 2 and Table 2 confirm the theoretical model, especially Equation (12), since it demonstrates the positive correlation between the number of export varieties and IIT regardless of country specific effects.
Table 2: Result of OLS (Electrical and Optical Equipment, 2012)
***: significant at 1% level ( ): t value This table shows the results of the OLS estimation of the data in Figure 2. The estimated coefficient of ln IIT2012 is positive as expected, and is significantly different from zero at 1 percent level. A one percent increase in the number of export varieties results in a 0.567 percent increase in the degree of IIT in 2012 for the electrical and optical equipment industry.
CONCLUSIONThe model presented shows that the extent of bilateral IIT is higher the smaller the gap in the number of export varieties between two countries. The empirical analysis of Japan and twenty-five countries provides support for the theoretical model presented in this paper. The theory also shows that similar number of export varieties between two countries, that is, more IIT can be a tool to redress trade imbalance between two countries. The policy implication of the results is that promoting higher product variety will increase the opportunity for IIT regardless of country specific effects.
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GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 417 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Vartia, Yrjö (1976) "Ideal log-Change Index Numbers," Scandinavian Journal of Statistics 1976; 3: 121ACKNOWLEDGEMENT The author acknowledges funding from the 2014 Miyata Research Grant.
BIOGRAPHYYoko Oguro is an Associate Professor in the Faculty of Economics, Meikai University. She can be reached at Faculty of Economics, Meikai University, 1 Akemi, Urayasu, Chiba 279-8550, Japan, GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 418 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1
The objective of this research is to examine the effect of corruption, tax burden, income, and tax administration efficiency on the size of the shadow economy. In this study, we have investigated the size of the shadow economy of 50 countries. We provide empirical evidence and explanation for the vicious circle of tax evasion and political corruption in which many developing countries, and sometimes even developed countries, often fall into. Also, an important relation between the level of income and tax evasion is identified. In the end, recommendations are made for policy makers. We find that standard prevention policies, that sometimes have a short-term effect, do not offer a real long-term solution for tax evasion and corruption; instead, policies and measures that impose a strong moral cost on corrupt politicians and on tax evaders can lead to a permanent reduction of both.
JEL: H26, D73, E62, KEYWORDS: Corruption, Tax administration, Tax Evasion
INTRODUCTIONAccording to Litina & Palivos (2015), political corruption demonstrated by a sequence of scandals, together with substantial tax evasion and poor public services, has been a “Greek tragedy” for at least the last three decades. Shadow economy and corruption are a problem for most of developing countries and also for some developed countries that are European Union members. Shadow economy and tax evasion are closely related to each other. Tsakumis et. al (2007) mention that Greece’s shadow economy is assessed to equal approximately 40% of its GDP and it is the largest in EU. Albanian finance authorities claim that tax evasion is estimated at least 50% (Tirana, 2015). Schneider (2004) defines shadow economy as an estimate of all market based legal production of goods and services (not including illegal products) that are intentionally hidden from public authorities.
Even though severe form of penalties, including harsh fines and imprisonment exist, tax evasion continues to thrive, especially in developing countries where also corruption is high. Moutos and Tsitsikas (2010), argue that corruption legitimizes the tax evasion since higher tax citizens are not provided with the public goods and services for which they are paying. Shadow economy and tax evasion have been analyzed using multidisciplinary perspective such as culture, economics, law, psychology, accounting and finance. Past studies have used mainly two schools of thoughts: the psychological approach and the economic approach.
The economy school relies on the idea of tax gap and offers economic theories and models to explain shadow economy and tax evasion, whereas the psychology school offers a psychology-based model in understanding tax evasion and shadow economy (Alley & James, 2006). These different approaches have lead researchers in shadow economy and tax evasion studies that explain them as either an economic problem or a behavioral issue of a certain society based on norms and culture. According to Jackson & Milliron (1986) and Richardson & Sawyer (2001), in the psychology model, factors such as social norms, attitude, and tax moral are used to explain tax compliance and tax evasion. However, in the economic models, tax evasion is motivated by the trade-off between benefits and costs, as argued by Allingham & GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 419 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Sandmo (1972). Sandma (2005), defines tax evasion as a violation of fiscal law where the taxpayer refrains from reporting income which is taxable.
The aim of this paper is to analyze the relation that exists between tax evasion and corruption, level of income, tax administration efficiency and tax burden. This study explores the role that corruption, among other factors, plays in explaining shadow economy and tax evasion behavior. The data for corruption, shadow economy, and tax burden of 50 countries in different regions of the world are considered for this study. The results of this paper have implications for both research and practice purposes. Policy makers should consider the impact of corruption level in minimizing the fiscal reforms effects. This paper is organized in the following manner. Section 2 discusses past studies related to the research question, Section 3 describes the research methods used, Section 4 presents the findings and discusses the outcomes, and Section 5 provides some conclusions and recommendations.
Shadow economy and tax evasion: Several studies have analyzed tax evasion and shadow economy in an international setting. Porcano (1988) studied the effect of audit rates, penalties, and other variables on shadow economy and tax evasion. Alm et al. (1990) has tested tax behavior and income declaration using Jamaican data. Alm and Torgler (2006) have studied the tax declaration and tax morale differences between 15 European countries and the United States. The tax morale for these countries was evaluated based on responses of the World Values Survey questionnaire using the questions related to beliefs of participants if “cheating on tax is justiﬁed if you have the chance.” They concluded that United States and Northern European countries had higher tax morale than Spain and other Romanic countries and the size of the shadow economy (as a percent of GDP) was negatively correlated to tax morale.
Riahi-Belkaoui (2004) studied the relation of tax moral and tax compliance with four variables in 30 countries. The views and perceptions of employees surveyed for the Global Competitiveness Report by the World Economic Forum (1996) were used to estimate the tax compliance behavior. The outcome of this study was that tax compliance and tax moral was related to economic freedom, competition laws, importance of equity market, and rate of violent crimes. The work of Riahi-Belkaoui’s (2004) was extended by Picur and Riahi-Belkaoui (2006) that found that tax compliance behavior was also related to bureaucracy levels and tax moral, in 30 countries. The study of Riahi-Belkaoui’s (2004) was expanded also by Richardson (2006) that analyzed the impact on tax evasion of noneconomic factors, in 45 countries.
Similarly to Riahi-Belkaoui (2004), tax evasion was measured using Global Competitiveness Reports (years 2002–2004). According to this study tax evasion across countries was related to tax morale, perceived fairness, general education level, tax law complexity, and income source.
Tsakumis, Curatola, and Porcano (2007) used Hofstede’s (1980) cultural dimensions, to investigate how tax evasion and shadow economy was influenced by the national culture. This study showed that culture has a significant influence on tax evasion. According to Tsakumis et al. (2007), actual tax evasion is very difficult to determine; so many studies on tax compliance behavior use substitute measures to evaluate the actual size of shadow economy and its related tax evaded. Some studies use government estimates on shadow economy to estimate tax evasion or vice versa. Similar Tsakumis et al. (2007), the terms ‘tax evasion’, ‘and shadow economy’, are used interchangeably throughout the study.
Corruption: According to Transparency International, corruption is defined as “the abuse of entrusted power for private gain” where the political decision makers manipulate policies, institutions and rules of procedure in the allocation of resources and financing, abusing so their position in order to maintain their power, status and wealth. According (Jain, 2001), there is a certain consensus that corruption refers to the act in which the power of public office is used for personal gain in a manner that contravenes the rules of the game. Corruption has been always a major issue for many developed and developing countries. Time GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 420 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 after times many scandals have shaken governments in Albania, Greece, Belgium, Italy, Spain and Japan as well. No country is immune from its dangerous consequences. Corruption can significantly affect the efficiency, fairness, and legitimacy of the state activities. The studies related to corruption have considered a broad array of factors including cultural, political, economic, and psychological ones.