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Accessed in May 16, 2017 117 Accessed in May 16, 2017 Accessed in May 16, 2017 https://www.transparency.org/news/feature/corruption_perceptions_index_201 6. Accessed in January, 7, 2018. 1 APPENDICIES Table Appendix A1 List of studied countries Developed countries Ord. Country Region(s) Income group 1 Australia East Asia and Pacific High income 2 Austria Europe and Central Asia High income 3 Belgium Europe and Central Asia High income 4 Canada North America High income 5 Chile Latin America and Caribbean High income 6 Croatia Europe and Central Asia High income 7 Cyprus Europe and Central Asia High income 8 Czech Republic Europe and Central Asia High income 9 Denmark Europe and Central Asia High income 10 Estonia Europe and Central Asia High income 11 Finland Europe and Central Asia High income 12 France Europe and Central Asia High income 13 Germany Europe and Central Asia High income 14 Greece Europe and Central Asia High income 15 Hungary Europe and Central Asia High income 16 Ireland Europe and Central Asia High income 17 Italy Europe and Central Asia High income 18 Japan East Asia and Pacific High income 19 Korea East Asia and Pacific High income 20 Latvia Europe and Central Asia High income 21 Lithuania Europe and Central Asia High income 2 22 Malta Middle East and North Africa High income 23 Netherlands Europe and Central Asia High income 24 New Zealand East Asia and Pacific High income 25 Norway Europe and Central Asia High income 26 Poland Europe and Central Asia High income 27 Portugal Europe and Central Asia High income 28 Seychelles Sub-Saharan Africa High income 29 Singapore East Asia and Pacific High income 30 Slovak Republic Europe and Central Asia High income 31 Slovenia Europe and Central Asia High income 32 Spain Europe and Central Asia High income 33 Sweden Europe and Central Asia High income 34 Switzerland Europe and Central Asia High income 35 Trinidad and Tobago Latin America and Caribbean High income 36 United Kingdom Europe and Central Asia High income 37 United States North America High income 38 Uruguay Latin America and Caribbean High income Developing countries 1 Armenia Europe and Central Asia Lower middle income 2 Bangladesh South Asia Lower middle income 3 Belarus Europe and Central Asia Upper middle income 4 Belize Latin America and Caribbean Upper middle income 5 Benin Sub-Saharan Africa Low income 6 Bolivia Latin America and Caribbean Lower middle income 3 7 Brazil Latin America and Caribbean Upper middle income 8 Bulgaria Europe and Central Asia Upper middle income 9 Cambodia East Asia and Pacific Lower middle income 10 Colombia Latin America and Caribbean Upper middle income 11 Congo, Rep. Sub-Saharan Africa Lower middle income 12 Cote d'Ivoire Sub-Saharan Africa Lower middle income 13 Egypt Middle East and North Africa Lower middle income 14 El Salvador Latin America and Caribbean Lower middle income 15 Ethiopia Sub-Saharan Africa Low income 16 Georgia Europe and Central Asia Upper middle income 17 Ghana Sub-Saharan Africa Lower middle income 18 Guatemala Latin America and Caribbean Lower middle income 19 India South Asia Lower middle income 20 Indonesia East Asia and Pacific Lower middle income 21 Islamic Republic of Iran Middle East and North Africa Upper middle income 22 Jamaica Latin America and Caribbean Upper middle income 23 Kenya Sub-Saharan Africa Lower middle income 24 Kyrgyz Republic Europe and Central Asia Lower middle income 25 Madagascar Sub-Saharan Africa Low income 26 Malaysia East Asia and Pacific Upper middle income 27 Mali Sub-Saharan Africa Low income 28 Mauritius Sub-Saharan Africa Upper middle income 4 29 Moldova Europe and Central Asia Lower middle income 30 Mongolia East Asia and Pacific Lower middle income 31 Namibia Sub-Saharan Africa Upper middle income 32 Nepal South Asia Low income 33 Pakistan South Asia Lower middle income 34 Peru Latin America and Caribbean Upper middle income 35 Philippines East Asia and Pacific Lower middle income 36 Romania Europe and Central Asia Upper middle income 37 Russia Europe and Central Asia Upper middle income 38 South Africa Sub-Saharan Africa Upper middle income 39 Thailand East Asia and Pacific Upper middle income 40 Togo Sub-Saharan Africa Low income 41 Tunisia Middle East and North Africa Lower middle income 42 Uganda Sub-Saharan Africa Low income 43 Ukraine Europe and Central Asia Lower middle income 44 Vietnam East Asia and Pacific Lower middle income Source: The World Bank Table Appendix A2 Summary of measurement of economic growth relating to tax revenue or expenditure Authors Dependent variable is economic growth and measurement method Used control Variables Solow 1956 Rate of production Physical capital, human capital, saving, 5 Authors Dependent variable is economic growth and measurement method Used control Variables personal income tax, neutral technological change Arrow (1962) Per capita income Investment in education Landau 1983 Growth rate of real GDP per capita Government consumption expenditure, total investment in education Landau 1985 annual growth rate of real per capita gross domestic income Human capital is weighted sum of enrollments in primary, secondary, and higher education divided by the population. Physical capital is the real share (at international prices) of investment in real national income (at international prices) or by share of private investment in national income Koster & Kormendi (1989) Income per capita Tax rate Stiglitz (1989) Level of income and rate of growth are two variables measured economic growth Government spending on education Aschauer (1989) Productivity Government spending for military and for infrastructure Barro (1991) Growth rate of GDP Tax revenue, government expenditure 6 Authors Dependent variable is economic growth and measurement method Used control Variables per capita on education Barro & Sala-i-Martin (1992) Growth rate and level of utility Tax policy Hitiris & Posnett (1992) GDP per capita Public spending for health Mankiw et al. (1992) GDP per working- age person Age enrolled in secondary school, Kneller et al (1999) Growth rate and GDP per capita Consumption -non-distortionary and distortionary tax rate, government spending for education, health and military Daveri & Tabellini (2000) GDP per capita Tax on labor income and unemployment Fölster & Henrekson (2001) GDP per capita Unemployment Bassanini & Scarpetta (2002) Real GDP Net investment in human capital Acemoglu et al. (2003 & 2008) GDP per capita Consumption per capita 7 Authors Dependent variable is economic growth and measurement method Used control Variables Aizenman & Glick (2006) GDP per capita Corruption, spending for military Arnold (2008) GDP per capita Personal Income tax Corporate tax Consumption tax and property tax Romero- Ávila & Strauch (2008) GDP per capita Consumption expenditure, tax revenue, direct tax Acemoglu et al. (2008) GDP per capita Democracy Attila (2009) GDP per capita Corruption and tax rate Lee & Kim 2009 GDP per capita Growth rate of population and geography Baltagi & Moscone 2010 GDP Spending for health Mercan et al. (2010) GNP Income tax, direct and indirect tax Ojede & Yamarik (2012) Income per capita Sale tax and property tax Siddiqui & Ahmed 2013 Growth rate of GDP per capita Institution indices and political rent, saving, trade and education D'Agostino et GDP per capita Government investment, government 8 Authors Dependent variable is economic growth and measurement method Used control Variables al (2016) spending for military, corruption Atkinson et al. (2016) Inactivity physical capital HDI, urbanization, Female, agricultural occupation, GDP per capita Lien and Thanh (2017) GDP per capita Government expenditure, inflation rate, trade, total investment, total population, human development index Table Appendix A3 Summary of examination of hypotheses of tax revenue and spending Authors Sample size Method used Findings 1. Fully support fiscal synchronization hypothesis Chang & Chiang 2009 15 OECD countries in 15-year period (1992–2006) Unit root test: Fisher and Phillips and Perron (1988) panel unit root test Co-integration test: by Kao 1999 Granger causality test The result supports the fiscal synchronization hypothesis, which debates that policy makers should make decisions relating revenue and expenditure jointly. Policy implication: To control budget deficits government should raise revenues and cut spending simultaneously. Mehrara et al. 2011 40 Asian countries in 14-year period (1995 to 2008) Unit root test: LLC and IPS unit root tests Co-integration test: by Kao 1999 Granger causality 9 Authors Sample size Method used Findings test 2. Fully support spend-tax hypothesis Saunoris & Payne 2010 UK in 55- year period (1955–2009) Unit root test: Augmented Dickey– Fuller (1979) test Phillips–Perron (1988) test Zivot– Andrews (1992) test Co-integration test: Engle–Granger co- integration test Granger causality test Finding supports the spend– tax hypothesis with asymmetric adjustment in long run equilibrium relationship between government revenues and expenditures. Policy implications: This result suggests that to reduce budget deficit government reduce expenditures. 3. Fully support tax- spend hypothesis Al- Khulaifi 2012 Qatar in 32- yer period (1980-2011) Unit root test: Augmented Dickey- Fuller and Phillip- Perron unit root test Co-integration and Granger causality test: Engle-Granger (1987) Both unit root tests ADF and Phillip-Perron found the variables are integrated of order one. Engle-Granger’s approach of co-integration found government revenue and expenditure to be co- integrated, and hence, a long-run relationship between them exists. Granger causality test found unidirectional causality running from government revenue to government 10 Authors Sample size Method used Findings expenditure. This supports tax-spend hypothesis 4. Confirmation of mixed hypotheses Chang et al. 2002 10 countries in 46-year period (1951-1996) includes: 03 newly industrialize d countries of Asia (South Korea, Taiwan, and Thailand) And 07 industrialize d countries (Australia, Canada, Japan, New Zealand, South Africa,UK, and the USA). Unit root test: augmented Dickey±Fuller tests (ADF test) and KPSS test Co-integration test: Used Schwartz Criterion (SC) and the likelihood ratio test to fit VAR model Run A Ljung±Box Q test on residuals and Lagrange multiplier test effect of ARCH systems Causality tests: Engle and Granger (1987) (1) Granger causality tests results support the `Tax- and-Spend’ hypothesis, for Japan, South Korea, Taiwan, UK, and the USA. (2) The results from the opposite relationship, support the `Spend-and- Tax’ hypothesis, for Australia and South Africa. (3) The finding of a feedback exists between revenues and spending support the `Fiscal Synchronization’ hypothesis for Canada (4) For New Zealand and Thailand, this study does not find evidence supporting any of the three hypotheses. This result supports neutral hypothesis 11 Authors Sample size Method used Findings Narayan 2005 9 Asian countries: India (1960– 2000) Indonesia (1969–1999) Malaysia (1960–1996) Nepal (1960–1996) Pakistan (1960–2000) Philippines (1960–2000) Sri Lanka (1960–2000) Thailand (1960–2000) Singapore (1963–1995) Unit root test: Augmented Dickey and Fuller (ADF, 1979) test Co-integration test: Pesaran et al. (2001) Granger causality test: the Hansen (1982) fully modified OLS (1) Exists the co-integration relationship between government revenue and government expenditure for Indonesia, Sri Lanka and Nepal only (2) conventional test shows that for Indonesia, Singapore, Sri Lanka and Nepal government revenue Granger causes government expenditure, consistent with the tax-and-spend hypothesis (3) In the long-run, the study finds that government expenditure Granger causes government revenue in the case of Indonesia and Sri Lanka, This result supports spend- tax hypothesis (4) while government revenue Granger causes government expenditure in the case of Nepal – tax- spend hypothesis 12 Authors Sample size Method used Findings Magazzin o & Dalena 2010 Italy in 132- year period (1862 to 1993) Unit root test: ADF unit root test (Dickey and Fuller, 1979, 1981) Phillips (1987) and Phillips and Perron (1988) Kwiatkowski, Phillips, Schmidt, and Shin (KPSS, 1992) VAR (Vector Auto Regressive) and VEC (Vector Error Correction) models were used 1914 to 1946, public expenditure Granger causes revenues. Finally, during the second post-war age, both public expenditure and revenues increased a lot, with similar rate of growth From 1862 to 1913 there is a unidirectional flow, from revenues to expenditure. Chowdhu ry 2011 USA 1970 to 2009 Unit root test: Afonso and Rault (2009) test and Akaike Information Criterion (AIC) Granger causality test (1) 40% of the states show the absence of any temporal relationship between these two variables. The result supports neutral institutional separation hypothesis, which states that decisions on taxation are independent from the allocation of government expenditures. 13 Authors Sample size Method used Findings (2) A support for the tax- spend hypothesis is found in 18% of the states while (3) spend-tax hypothesis is prevalent in another 16%. (4) In 26% of the states, the revenue and expenditures decisions are jointly determined by the government (the fiscal synchronization hypothesis) Paleolog ou 2013 3 EU OECD countries: Sweden, Germany and Greece period 1965 to 2009 Unit root test: Dickey–Fuller (ADF, 1979),the Phillips and Perron (PP, 1988),the Kwiatkowski et al. (KPSS, 1992) and the Ng-Perron (NP, 2001) Co-integration test: examining the long- run relationship between revenues and expenditures: use the Gregory and (1) There is indeed a long- run equilibrium relationship be- tween general government revenues and expenditures in Sweden, Germany and Greece. (2) The results for Sweden and Germany show that there is no long-run relation in terms of threshold co- integration. However, the existence of a linear long- run equilibrium co- integration relationship in government revenues and 14 Authors Sample size Method used Findings Hansen (1996) residual-based test utilize the threshold autoregressive (TAR) and momentum threshold autoregressive (MTAR) models elaborated originally by Granger (1998) Enders and Siklos (2001) as there could be some asymmetries in the adjustment process towards the long-run equilibrium expenditures implies that there is a force of recovery budget deficit or a co- movement of revenues and expenditures through time. The symmetric ECM provides support for the fiscal synchronization hypothesis in both countries (3) The results for Greece provide support for the spend-and-tax hypothesis with asymmetric adjustment towards long-run equilibrium Azam et al. (2015) 5 ASEAN countries 33 –year period Co-integration test and Granger test Energy consumption has significant and long run relationship to economic growth for almost all ASEAN-5 countries Table Appendix A4 Summary of measuring and evaluating effects of corruption on public finance and economic growth 15 Authors Sample size Method used Findings Barro (1973) NA Theory research Taxes depends on government spending and political control Bird et al. (2008) 25 High income countries and Latin America 2SLS Corruption determines tax effort. Cerqueti, and Coppier (2009) NA Theory research Game theory Relationship between the tax rate and tax revenues depends on the relevance of the “shame effect” of being detected in a corrupt transaction. In a country with low shame effect: tax revenue increases accordingly to increasing tax rate. In a country with high shame: tax revenue raises to a threshold then reduces Ajaz, and Ahmad (2010) 25 developing countries over a 16 years period: 1990-200 GMM Corruption has negatively significance impact on tax revenue Beekman et al. (2013) 44 communities Survey and OLS Corruption is a proxy that reduces private investment and trade Angelucci & Russo (2015) NA Theory research Develop a scheme of corruption: Intermediaries play an important role in making feedback scheme be more valuable and suggest that does not require government to verify the accuracy of complaints Aparicio et al. (2016) 43 countries 3SLS Control of corruption promote opportunities of 16 Authors Sample size Method used Findings Entrepreneurship and raises economic outcome Aghion et al. (2016) USA Develop a Schumpeterian growth model Government corruption affects quality of the infrastructure provided per tax dollar, and thus economic growth. Effects of taxation on growth should be increasing and concave, and that higher local corruption should weaken the positive effect of taxation on growth. D'Agostino, Dunne, Pieroni (2016) 106 countries GMM Interactions between corruption and investment and corruption and military spending have strong negative impacts on economic growth. Different measures of corruption, levels of economic development and groupings of countries. Capasso, and Santoro (2017) Italia System GMM estimation Corruption is a complex and multifaceted phenomenon. Active corruption may negatively affect firms’ productivity more than passive corruption. Corruption may threaten socio-economic stability and reduce growth potential. Cintra et al. (2017) NA Literature review Difficulty defines corruption and stall perceptions. Corruption usually refers to the use of public position for private gain. Brianzoni, NA Theory research According to relationship 17 Authors Sample size Method used Findings Campisi and Russo (2017) between corruption in procurement and growth, they revealed that exist the inverse linkage between corruption and growth. Jahnke (2017) 33 African countries 2011-2013 OLS Petty corruption directly reduces tax morale but also diminishes trust in the tax department and hence indirectly affects tax morale. ax morale but also diminishes trust in the tax department and hence indirectly affects tax morale. The effect on tax morale is more severe in countries and regions where fewer people are affected by petty corruption and becomes insignificant if extortion of bribes is particularly prevalent Table Appendix A5 Non-Linear correlation test results H0: Coefficient is zero Dependent variable: lrgdp Coef. Std. Err. z P>z FDI 0.003 0.001 1.99 0.05 INF -0.01 0.00 -2.62 0.01 18 HDI 1.34 0.45 2.98 0.00 TAXgdp 0.04 0.01 3.42 0.00 GEXgdp -0.04 0.01 -2.39 0.01 CPI 0.01 0.01 1.82 0.07 CCI 0.63 0.32 1.99 0.05 All variables are closely correlated in linear relationship. Table Appendix A6 Results of variance inflation factor test (VIF 4 ) Acording to Weisberg (2005), p. 216 we learn that using “collinear predictors can lead to unacceptably variable estimated coefficients compared to problems with no collinearity”. In a mean function: 𝐸(𝑌|𝑋1 = 𝑥1, 𝑋2 = 𝑥2) = 𝛽0 + 𝛽1𝑥1 + 𝛽2𝑥2, suppose r1,2 is the sample correlation between 𝑥1 and 𝑥2, and define the: 𝑆𝑋𝑖𝑋𝑗 = ∑(𝑥𝑖𝑗 − 𝑥�̅� ) 2 to be the sum of square for the jth term in the mean function. For j=1,2 we so that: 𝑉𝑎𝑟(𝛽𝑗)̂ = 𝜎2 1 − 𝑟1,2 2 1 𝑆𝑋𝑖𝑋𝑗 The variances of 𝛽1̂ and 𝛽2̂ are minimized if 𝑟1,2 2 = 0, while 𝑟1,2 2 is near 1, these variances are greatly inflated, for example if 𝑟1,2 2 = 0.95, the variance 𝛽1̂ 𝑖𝑠 20 times as large as if 𝑟1,2 2 = 0 VIFj is called variance inflation factor and it will be computed by: 𝑉𝐼𝐹𝑗 = 1 1−𝑅𝑗 2 (Marquardt, 1970). 4 VIF is variance inflation factor, which was developed by Marquardt ( 1970) 19 Assuming that Xj’s could have been sampled to make 𝑅𝑗 2 = 0, while keeping SXiXj constant, the VIF represents the increase in variance due to correlation between the predictors and hence, collinearity. In case of that 𝑅𝑗 2 = (0.95)2 VIF should be 1/(1- 0.95 2 ) = 10.256. A rule of thumb is that if VIF(𝛽𝑗)̂ >10 then multicollinearity is high. Dependent variable: lrgdp Variable VIF 1/VIF CCI 19.38 0.051601 CPI 18.87 0.05299 TAXgdp 10.01 0.099906 GEXgdp 8.64 0.115725 HDI 1.03 0.97383 INFL 1.02 0.976784 FDI 1.01 0.988495 Mean VIF 8.57 Except CCI, CPI and TAXgdp that have VIF >10, other remain variances are smaller than 10, hence we can confirm that among economic growth, tax revenue and control of corruption exist the close correlation. Table Appendix A7 Public choice timeline 20 Source: Butler (2012) Table Appendix A8 The analytical results 21 1. Description of variables 2. Correlation matrix 22 3. HT and IPS unit root test results (normal variables) 23 24 25 26 27 28 29 4. Results of co-integration test TAXgdp – GEXgdp GEXgdp-TAXgdp Lrgdp-TAXgdp 30 Lrgdp-GEXgdp 5. Granger test results 6. GEXgdp-TAXgdp 31 TAXgdp-GEXgdp 7. Results of verification of governance role in modifying economic growth by SUR model 32 SUR for 38 developed countries 33 34 SUR For 44 developing countries 35 36 37 38 8. Results of verification of governance role in modifying economic growth by SGMM Effect of governance and its interaction with public finance on economic growth For 38 countries 39 40 For 44 developing countries 41 42 43 9. Robustness check with CPI 8.1 CPI in developed countries (38 countries) 44 45 46 47 9.2. CPI in 44 developing countries 48 49 50 51 52 53 10. Results of VIF’s test: 54 11. Results of non-linear test - FDI – Lrgdp - INFL – Lrgdp - HDI – Lrgdp - TAXgdp – Lrdgp - GEXgdp – Lrgdp - CCI – Lrgdp - CPI – Lrgdp