The Relation between Corruption and Economy in OECD Countries: A Moderating Role of Tax Revenue

Abstract

This research study's goal is to examine how tax income influences the relationship between corruption and the economy in OECD countries. OECD countries 35 panel data from the years 1996 to 2021 have been used for this purpose. Economic growth is used as the dependent variable, corruption and tax revenue as the independent variables, and education, foreign direct investment (FDI), inflation, and governance as the control factors. First, we used the cross-sectional dependence CD test to check whether the cross-correlations of the errors are zero. Next, Panel unit-root test is used to check whether the data are stationary. Hausman test is used test to check whether endogenous regressors (predictor variables) are present in the regression model. Finally, Panel ARDL (PMG) techniques used for short-run and long-run analysis of variables. Similarly, the Baron and Kenny estimating process has been used to assess the direct and indirect link between these variables to discover the mediating influence between corruption, tax revenue, and economic growth. According to the panel ARDL (PMG) analysis's findings, economic growth is long-term positively impact by corruption, tax revenue, education, FDI, and governance. While inflation and political unrest have a negative and considerable impact on economic growth. The study's main finding is that tax revenue and corruption have a positive and substantial relationship with economic growth. The principal-Agent theory aids in understanding both governmental structure and the effects of corruption. The mediation analysis's conclusion is that corruption not only directly affects economic growth, but also indirectly. The study provides policymakers with comprehensive knowledge that decreasing corruption results in higher tax receipts and economic growth.