Political connections, corruption and tax evasion: a cross-country investigation

Author:Hichem Khlif, Ines Amara
Position:Faculty of Economics and Management of Sfax, University of Sfax, Sfax, Tunisia
Pages:401-411
SUMMARY

Purpose This paper aims to examine the association between political connections and tax evasion and test whether corruption level affects this relationship. Design/methodology/approach Tax evasion measure is based on Schneider et al. (2010), while country’s political connection trend is based on Faccio (2006). Findings Using a sample of 35... (see full summary)

 
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Political connections, corruption
and tax evasion: a cross-country
investigation
Hichem Khlif and Ines Amara
Faculty of Economics and Management of Sfax, University of Sfax, Sfax, Tunisia
Abstract
Purpose This paper aims to examine theassociation between political connections and tax evasionand
test whethercorruption level affects this relationship.
Design/methodology/approach Tax evasion measure is based on Schneider et al. (2010), while
countryspolitical connection trend is based on Faccio (2006).
Findings Using a sample of 35 countries, the authorsdocument that political connections are positively
associatedwith tax evasion and this relationship becomesstronger for high corrupt environment.
Originality/value The ndings have policy implicationsfor countries aiming to combat tax evasion as
political connectiontrends in one country reduce the level of tax compliance.In addition, political connections
and corruptionplay a complimentary role in increasingtax evasion practices.
Keywords Corruption, Tax evasion, Political connections
Paper type Research paper
1. Introduction
Both political connections and tax evasion have attracted a great deal of attention
among policymakers as widespread phenomena that may adversely affect the economic
development in one country. Research concerning the importance of political
connectionsasadeterminant of tax evasion is important as very little is currently
known about this association at country level. Some studies have examined the effect of
political connections on tax avoidance (Adhikari et al.,2006in Malaysia), tax
aggressiveness (Kim and Zhang, 2016 in USA), or on the capability of the state to
enforce tax legislations (Lin et al., 2017 in China) at rm level. All these empirical
enquiries have documented that political connections have an adverse effect on tax
compliance behaviour through more tax avoidance, more tax aggressiveness practices
and less effective enforcement of tax compliance by State tax authorities. However,
there is no empirical evidence concerning the linkage between political connections and
tax evasion using cross-country dataset.
Accordingly, this study tries to complement the above streams of research by exploring
the direct effect of political connection on tax evasion at country level. In addition, it tests
whether corruption levelmoderates such a relationship. By doing so, our paper extends also
previous literature dealing withthe determinants of tax evasion initiated by Riahi-Belkaoui
(2004)[1]. Understandingthe economic consequence of political connectionson tax evasion is
crucial for governmentsthat have an objective to ght or reduce tax evasionpractices.
Political connection trends in one country are proxied using the seminal work of Faccio
(2006) dealing with political connections at country level, while tax evasion is measured
using Schneider et al. (2010). Based on sample of 35 countries, we provide evidence that
countries characterised by high level of political connections have higher levels of tax
Corruption and
tax evasion
401
Journalof Financial Crime
Vol.26 No. 2, 2019
pp. 401-411
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-01-2018-0004
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm

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