by E. Friedman, S. Johnson, D. Kaufmann, and P. Zoido-Lobatón (published in The Journal of Public Economics, June 2000)
Across 69 countries, higher tax rates are associated with less unofficial activity as a percent of GDP but corruption is associated with more unofficial activity. Entrepreneurs go underground not to avoid official taxes but to reduce the burden of bureaucracy and corruption. Dodging the "Grabbing Hand" in this way reduces tax revenues as a percent of both official and total GDP. As a result, corrupt governments become small governments and only relatively transparent governments can sustain high tax rates.
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