Indirect Consequence of Corruption : Evidence from Heterogeneity in Corruption Experience and Tax Morale

This paper identifies indirect effects of corruption as observed in declining individual tax morale due to their experience with corruption. Corruption weakens the fiscal contract between governments and taxpayers. So, it hurts the motivation to pay taxes and thus creates dishonest citizens. The 7th wave of the World Value Survey included both the corruption experience and perception questions for the first time. To identify corruption effects, I exploit corruption experience heterogeneity, which is more exogenous than other measures of corruption such as corruption perception. By deploying a multi-level hierarchical mixed effect modeling, I find that corruption experience significantly deteriorates tax morale, which is a measure of people’s willingness not to cheat on taxes. The potential carriers of corruption effects are fairness in the tax system, ethnic diversity, the public shame of being exposed, and public policies. Several other hypotheses tests rule out potential alternative explanations including effects of peers and reduced-expected costs of cheating on taxes due to revealed corruption