The Effect of Corruption and Governance on Tax Revenues

Developing countries face a number of institutional problems in the process of revenue generation. One of the main problems is the corruption in tax administration. The second main problem of low revenue generation is the low quality of governance. This study analyses the effect of institutional and structural variables (corruption and governance) on tax revenues using a panel data set for 25 developing countries over the period 1990-2005. The GMM regression results show that corruption has an adverse effect on tax collection, while good governance contributes to better performance in tax collection. It is further observed that institutional variables have a significant effect on tax revenues.