A tax on the poor to benefit the rich: Corruption and Inequality

I often wondered what impact doing my job from a developing country instead of a developed one would have on my thinking about inequality. One area where I can see a big shift is my feelings about corruption and its importance to inequality. When I lived in Malawi, I remember writing to Kevin Watkins, the then head of Oxfam’s policy team, asking him to stop calling for debt cancellation for Malawi as the money would simply be wasted by the crooked government. I then moved back to the UK and spent many years fighting for debt cancellation for Malawi and many other countries! I think the truth is somewhere in the middle.

I do not think that corruption is the only decisive factor in whether a country develops or not. Ha Joon Chang put this brilliantly in his book Bad Samaritans, when he compared the development history of Zaire and Indonesia. Both had fabulously corrupt dictators, Mobutu in Zaire, and Suharto in Indonesia, but Indonesia experienced decades of inclusive growth whilst the DRC today is still desperately poor. Anyone looking for an explanation for these two development paths would have to look beyond simply the level of corruption.

Nevertheless, living here in Kenya has reminded me that corruption is still extremely important in the fight against poverty and inequality, and it is important to understand the relationship between the two. It seems to me that the relationship is clearly two ways. Corruption increases inequality and inequality breeds corruption. Wealthy elites can use their power to secure favourable government actions further increasing their wealth, creating a vicious cycle that increases the gap between rich and poor.

Corruption itself impacts inequality in different ways. At the most basic level, the poorest are more likely to have to pay bribes. One study in Mexico found that police are more likely to demand bribes from the poor as the rich are more willing and able to retaliate. Bribes represent a much higher proportion of the incomes of the poorest, so they are similar to regressive taxes. For example, in Paraguay, the poor pay 12.6 percent of their income to bribes while high-income households pay 6.4 percent.

Women often have less power and voice to demand accountability, making them easier targets for corruption. Women are more likely than men to identify the negative impacts of corruption.

Arguably the greatest impact on inequality and poverty is ‘grand corruption’, the large-scale looting of state resources and organised influence of state actions by elites. This impacts government revenue and spending.

This grand corruption is very often aided and abetted by actors from rich nations, or rules in rich nations that ensure they turn a blind eye to large amounts of money being channelled from poor countries to rich ones. I remember well an Indian academic I met saying he was sick of the Transparency International index painting a picture of corruption being a problem of the poorest countries, shouting that ‘for me Switzerland is the most corrupt nation on earth!’. I would add that the City of London would be a very close second.

Grand corruption can have a major impact on tax revenues. The richest use their influence to make sure that they and their businesses pay as little tax as possible. The global system of tax havens facilitates this on an industrial scale. This can be through ‘legal corruption’, like the use of legions of lobbyists by corporate America. Or bribes are simply paid to tax officials to look the other way. This tax dodging not only directly enriches the richest, increasing inequality, it also denies vital public revenues to governments.

Public spending is often also hit hard. The wrong investment projects are chosen for the wrong reasons, and the wrong people are chosen to deliver them, all because of corruption. As a result, the cost of delivering projects are often hugely inflated, increasing government spending and the debts that are incurred in delivering them.

Faced with falling revenues from those at the top, governments are increasingly turning to indirect taxes like VAT, further increasing inequality.

Finally, the legal and illegal depletion of state resources through corruption means there is less money available for education, health and other public services. In the Dominican Republic, Oxfam and allies showed that corruption was costing the state large enough to double health spending.

It also means that impoverished public services are often forced to rely on payments from the poor. These can be legal like health user fees or illegal like teachers selling exam papers.

Women are more dependent on public services, as the primary caretakers of their families, and are more exposed to corruption in service delivery. They are less likely to be able to access private alternatives, so they are hit harder by the impact of corruption on the quality and quantity of public services.

The fight against corruption, and particularly the grand corruption of elites, is pivotal to ensuring revenue for public services and more equal societies.

Authors: Max Lawson