Tax evasion—bribery paradox

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Abstract
Building on Robinson & Acemoglu’s (Economic origins of dictatorship and democracy, Cambridge University Press, 2006) framework, this paper theoretically examines the interplay between tax evasion and bribery, focusing on the trade-off between tax evasion penalties and the deterrent effects of bribery sanctions in democratic societies with redistributive politics. The paper introduces the concept of the "tax evasion-bribery paradox" as a novelty. In this paradox, low detection probabilities of tax evasion caused by an under-resourced government make bribery less attractive but also prevent effective tax collection. Bribing tax officials is a high-stakes action that provides no added benefit if tax evasion is already going undetected. Otherwise, a similar mitigating effect on bribery is observed when the tax authority is well-resourced to enforce compliance. The high probability of detection discourages bribery as strong monitoring and auditing make it more likely that illegal activities will be uncovered. The study also emphasises that a greater likelihood of detecting bribery considerably decreases the occurrence of bribery. In this case, the tax evasion rate is limited to the tax rate level, while the tax penalty conditions the bribe. Moreover, wealthier individuals are more likely to engage in bribery due to their ability to absorb the associated costs. At the same time, lump-sum transfers can reduce bribery incentives compared to non-lump-sum transfers.
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