Performance-based salaries of tax officials in Pakistan have significantly increased tax collection but the government move has also enhanced bribe rates, says a recent study by the International Monetary Fund (IMF).
The study — “Tackling Corruption in Government” — analyses more than 180 countries and finds that more corrupt countries collect fewer taxes, as people pay bribes to avoid them, including through tax loopholes designed in exchange for kickbacks. The study also determined that when taxpayers believe their governments are corrupt, they are more likely to evade paying taxes.
The IMF also studied recent performance-related incentives that Pakistan offered to its tax officials, which had both desirable and undesirable consequences.
“While performance-based salaries of tax officials (in Pakistan) led to a significant increase in tax collection (by as much as 50 per cent), bribe requests increased by 30 per cent,” the study found.
The Fund suggests combining higher wages with monitoring and sanctions to deal with the problem
The IMF suggests combining higher wages with monitoring and sanctions to deal with this problem. Such reforms in Georgia, for example, reduced corruption significantly and tax revenues more than doubled, rising by 13 percentage points of GDP between 2003 and 2008. Rwanda’s reforms to fight corruption since the mid-1990s bore fruit, and tax revenues increased by 6 percentage points of GDP.
Combating corruption is one of the United Nations sustainable development goals because of the widespread perception that tackling corruption is critical for macroeconomic performance and economic development.
The IMF study shows that overall, the least corrupt governments collect 4 per cent of GDP more in tax revenues than countries at the same level of economic development with the highest levels of corruption.
The study points out that corruption also distorts governments’ priorities.
For example, among low-income countries, the share of the budget dedicated to education and health is one-third lower in more corrupt countries. It also impacts the effectiveness of social spending. In more corrupt countries school-age students have lower test scores.
The IMF notes that corruption also prevents people from benefiting fully from the wealth created by their country’s natural resources. Because the exploration of oil or mining generates huge profits, it creates strong incentives for corruption. The IMF research shows that resource-rich countries, on average, have weaker institutions and higher corruption.
The study also discusses the association between corruption and revenues and determines that cross-country econometric analysis confirms this link. An improvement in the Control of Corruption Index by one-third of a standard deviation is associated with an increase of 1.2 percentage points in government revenues as a share of GDP. If that improvement is applied to all countries, the implied increase in total tax revenues could be $1 trillion.
The study argues that gains would be greater considering that lower corruption would raise economic growth, further boosting revenues.
The IMF notes that by distorting the incentives of policymakers and civil servants, corruption undermines the quality and effectiveness of government policies. Core public services, such as the provision of quality public infrastructure and education, can be severely hampered.
This, in turn, has a negative effect on governments’ ability to promote economic growth and reduce poverty.
The study shows that countries with lower levels of perceived corruption have significantly less waste in public investment projects.
In a chapter on corruption in state-owned enterprises, such as oil companies and electric and water companies, the study points out that these enterprises are less efficient in countries with high levels of corruption.
The study argues that fighting corruption requires political will to create strong fiscal institutions that promote integrity and accountability throughout the public sector.
The study suggests that high levels of transparency and independent external scrutiny help fight corruption as does a free press.
Reforming institutions increases the chances for success in the fight against corruption. Chances of success are greater when countries design reforms to tackle corruption from all angles.
Building a professional civil service is also essential for curbing corruption as it enhances revenue administration and management of natural resources.
The study also suggests greater cooperation among nations as it would make it harder for corruption to cross borders. The IMF notes that more than 40 countries have already made it a crime for their companies to pay bribes to gain business abroad.
“Curbing corruption is a challenge that requires persevering on many fronts, but one that pays huge dividends. It starts with political will, continuously strengthening institutions to promote integrity and accountability, and global cooperation,” the study concludes.