Why is Corruption So Much More Taxing Than Tax? Arbitrariness Kills

Shang-Jin Wei

NBER Working Paper No. 6255
Issued in November 1997
NBER Program(s):   ITI

This paper examines the effect of corruption-induced uncertainty on foreign direct" investment. The measure of uncertainty is constructed based on unpublished individual survey" responses on levels of corruption in host countries. The result is striking. The effect is negative statistically significant and quantitatively large. An increase in the uncertainty level from that of" Singapore to that of Mexico, at the average level of corruption in the sample raising the tax rate on multinational firms by 32 percentage points. Hence (uncertainty) effect can and does have first-order importance.

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Document Object Identifier (DOI): 10.3386/w6255

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