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Steve Hinnefeld
University Communications

Last modified: Wednesday, December 7, 2011

Corporations owned in corrupt nations more likely to evade taxes in the U.S., study says

Dec. 5, 2011

BLOOMINGTON, Ind. -- A study by economists at Indiana University and the U.S. Treasury Department finds that corporations owned by individuals from countries with high levels of corruption are more likely than others to evade taxes in the United States.

The study, "Importing Corruption Culture From Overseas: Evidence From Corporate Tax Evasion in the United States," supports the idea that a culture of corruption can be imported from other countries into U.S. corporate culture. It also finds that U.S. tax enforcement measures have been less effective for corporations whose ownership is based in high-corruption countries.

The study is available online from the Social Science Research Network. Authors Bradley Heim and Anh Tran of the IU School of Public and Environmental Affairs and Jason DeBacker of the Treasury Department's Office of Tax Analysis presented their findings recently at the National Tax Association annual conference in New Orleans.

"Culture appears to play an important role in tax evasion, and the current enforcement policies seem less effective in dealing with it," the authors write. "Our findings call for the consideration of cultural factors in designing corporate governance and law enforcement. In this globalized world, what happens far away may have implications for us at home."

The study compiles evidence of tax evasion from a confidential database of almost 25,000 corporate audits performed by the Internal Revenue Service between 1997 and 2006. It compares those results with corruption norms from Transparency International's widely used Corruption Perception Index.

Tax evasion is measured by dividing a corporation's overall tax deficiency, as determined by the IRS audits, by its total income. Among small and mid-sized firms, poor corruption ratings are strongly associated with tax evasion. The association is less for larger firms, possibly because owners are more likely to delegate responsibility for reporting income and paying taxes.

For example, a company with average assets and income ($20 million and $50 million, respectively) with owners from a high-corruption country such as Nigeria has, on average, tax deficiencies $72,700 greater than a same-sized company with owners from a low-corruption country such as Sweden. But for companies with assets of over $100 million, the difference in tax-paying behavior is negligible between those owned in high- and low-corruption countries.

The study also examines the effect of U.S. tax enforcement measures which, implemented in the mid-2000s, significantly increased overall tax compliance. It finds the efforts were less effective in reducing tax evasion by corporations whose owners are from countries with higher corruption norms.

The study contributes to a growing literature on the role of culture in illegal financial activity, an area that, in the past, had been studied largely as a product of individual motivation and opportunity. It is available online at

To speak with Heim or Tran, contact Steve Hinnefeld, Indiana University Communications, at 812-856-3488 or