The Political Economy of Governmental Corruption: The Logic of Underground Government

Abstract

"There is little doubt that taxes create incentives for tax avoidance. Illegal, underground markets arise in the private sector, and there is considerable evidence that the tax-induced underground economy is very large and is growing in the United States and in other parts of the world. It is also widely recognized that regulatory constraints induce private sector underground activity. This is evidenced by the thriving markets in drugs, prostitution, gambling, stolen goods, and the labor of illegal aliens despite laws against the sale or purchase of such goods and services. Thus, both taxes and regulation generate incentives for people to engage in illegal underground activities. People react accordingly.
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\n"Little attention has been paid, however, to the incentives faced by those doing the regulating and taxing. Do regulators and tax collectors also face incentives to engage in illegal activities? If so, what affects the strengths of these incentives? Is political corruption likely to be caused by the same factors that encourage corruption in the private sector? And how influential are the taxes and regulations? In the following pages, we delineate the opportunities for political corruption, examine the relative strength of incentives to participate in corrupt activities, and make predictions about the future opportunities for corruption."