Effect of Corruption on Tax Revenues in the Middle East

This is the first study that estimates the impact of corruption on the revenue generating capacity of different taxes in the Middle East. We find that the low revenue collection as a share of GDP compared to other middle-income regions is due in part to corruption. Certain taxes are, however, more affected by corruption than others. Taxes requiring frequent interactions between the tax authority and individuals, such as taxes on international trade, seem to be more affected by corruption than most other forms of taxation. This suggests that if governments need to raise more tax revenues in a way that minimizes distortions and maximizes social welfare, they should implement reforms that reduce corruption, or alternatively, raise revenues from taxes that are less susceptible to corruption. The potential measures for reform of the revenue system and administration are examined