Unraveling Elites Dilemma: Information Asymmetry and Anti-corruption in Taxation

• In Event: State Capacity and Taxation

Abstract

Corruption is a pervasive issue in many developing countries. Even historically, developed countries have faced corruption problems during their early and middle development stages. However, it is evident that corruption levels vary across the globe, sometimes regardless of economic growth. Why do some countries succeed in combating corruption while others do not? Specifically, we find that some politicians or political elites are more successful in sanctioning corrupt bureaucrats, while others fail to do so. Thus, this research plans to investigate: Why do elites fail to punish corrupt bureaucrats?

I argue that the information asymmetry between elites and bureaucrats significantly influences elites’ ability to address corruption within bureaucratic structures. When elites lack crucial information about bureaucrats’ actual corruption levels, the costs incurred in identifying and sanctioning corrupt officials rise substantially. Moreover, bureaucrats’ informational advantage can intensify elites’ reliance on them for policy implementation, thereby undermining elites’ willingness and capacity to sanction corrupt bureaucrats.

This information asymmetry is particularly prominent in tax collection, a critical domain in the comparative political economy of development. Efficient tax compliance hinges on the effective detection and penalization of corrupt bureaucrats. However, when bureaucrats, acting as tax collectors, hold privileged information about taxpayers, identifying inefficiencies or corruption within the tax system becomes a challenging task. This lack of information might foster an environment where tax evasion and corruption between collectors and taxpayers persist, impeding tax collection efficiency and perpetuating corruption.

My paper hypothesizes that the reduction in bureaucrats’ monopoly on local information, through centralization or tax agency consolidation, could lead elites to lean toward punishing corrupt officials based on more accessible, non-asymmetric information. To test these hypotheses, this research examines evidence from China’s tax reform between 2012 and 2018, encompassing the transition from sales tax to value-added tax (VAT) and the merger of two tax agencies into one. Since these reforms are not primarily motivated by addressing corruption in taxation, the gradual implementation of reforms offers an opportunity for staggered Difference-in-Difference (DiD) estimations to discern how exogenously reducing information asymmetry contributes to combating corruption. Additionally, I extract tax-related corruption cases from 85 million litigation cases in China’s Court Judgment Documents, compiling an anti-corruption prosecution database that is among the most comprehensive in China’s context to date.

This research seeks to contribute to the broad literature on both the rule of law and the political economy of development. It highlights the role of information asymmetry between elites and bureaucrats in enforcing anti-corruption laws and regulations and sheds light on how this asymmetry can undermine the effectiveness of taxation systems, hindering overall development. Moreover, establishing a comprehensive anti-corruption prosecution database will provide valuable insights for policymakers, scholars, and practitioners, offering a deeper understanding of the legal framework and intricacies of judicial processes in anti-corruption endeavors.

Author

• Chengyu Fu, Harvard University