Public Procurement and Tax Paying; A Vicious Circle or a Good Example Banu Dincer, Faculty of Economic and Administrative Sciences, Department of Business Administration, Galatasaray University, Turkey. E-mail: bdincer@gsu.edu.tr Caner Dincer, Faculty of Economic and Administrative Sciences, Department of Business Administration, Galatasaray University, Turkey. E-mail: cdincer@gsu.edu.tr Abstract The literature on corruption shows that the taxpayers attitude and the public procurement performance of governments can easily reinforce each other. As the public procurement is one of the most open areas of work to corruption, in a corrupt society the public procurement becomes an important indicator for firms and individuals to decide about their tax paying attitude. The tax compliance attitudes and behavior change according to what they receive as an investment and service and the good quality and performance in these areas confirm a good public procurement process which plays positively in taxpaying attitude otherwise a sense of corruption leads to more tax evasion and tax avoidance and it forms a vicious circle of corrupt behavior. While a large body of work on public procurement and tax payers attitude has emerged separately, the relationship between the two and remains a largely unexplored area. We use firm level and individual level approach to address this knowledge gap. We employed an in-depth semi-directed interviews with 6 director level employees, 6 company owners and 22 public employees to see the possible reasons in their attitude towards tax and the public procurement. The paper focuses on how the perception of public procurement affects the taxpayers attitudes, we explore the possible links and reasons to search for tax evasion and tax avoidance practices and shed light to the strength of good practices. Our results show that it is corruption in public procurement that largely drives higher levels of tax avoidance and evasion; that is, corruption in the procurement processes is a significant determinant of taxpayers attitude in a firm or individual basis. The presence of any kind of rumor, claim or experience results in a search for tax avoidance or evasion. So, governments seeking to decrease tax evasion and avoidance must work first to ensure that they are well appreciated with their investments, services and procurement processes to better tax compliance levels. The results also show that a comprehensible and clear public procurement processes encourage individuals to comply and encourages them to influence other taxpayers to comply as they can easily see the benefits of paying tax and many other reasons even if the competition or living conditions are fierce. Key Words: Corruption, Taxpayers attitude, Public procurement JEL Classification: M40, M10, M49 1
1. Introduction Taxation is a vital resource for governments to realize the public services and it is perceived as a significant cost by corporations and individuals (Sikka 2010). Accordingly, tax, public interest and public procurement processes have come into sharp focus in recent years (Dalton et al., 2007; Payne and Raiborn 2015). Public procurement as a process requires the satisfaction of the complex accountability measures and it is a shared domain of supply management, public administration, and public policy. Evem a minor leak or corruption in a public procurement can erode tax revenue of the governments leading to serious threats for the public interest and the government (Greve, 2008). The public procurement is a vast area where activities of fundamental importance are realized and great amount of capital is involved. That attracts every actor in the economy as public sector represents around half of the world s economies (Knight et al., 2007). The important actors are political groups, public procurers and the interest groups and the public. All these actors, stakeholders seek their self-interest in public procurement (Murry, 2007) and try to accomplish specific policy objectives. Especially in developing countries, political groups preceive public procurement as an area open to corruption and public procurement is constrained for the purpose (Kaufmann, 1997). Efficient tax spending by the governments and tranparency raises overall public tax perception and in the same manner corruption, inefficiencies in the spending of public money has a negative effect on tax payments. This relationship represents a gap in the extant g literature. Therefore the link between public procurement, tax revenue and corruption is the focus of this study. The understanding of this link can suggest direction for future research. 2. Literature Review Public procurement is defined by scholars, practitioners, special bodies, and international organizations across many definitions, however it must be emphasized that as Snider and Rendon (2012) affirm, procurement includes contracting and contract management. Accordingly, United Nations describe public procurement as an overall process of acquiring all kind of goods, civil works and required services. All definitions of public procurement emphasize that public procurement is an instrument for public policy utilizing taxpayers Money for the public interets. Where public policy is what the governments prefer or not to do during their tenure. Accordingly, public procurement is seen as an instrument of implementing public policy (Bolton, 2006; Arrowsmith, 1995; Knight et al., 2007). In order to realize the public procurement the governmets use other parties to realize the procurement and the projects to implement so the use of others designated as the agent, acting 2
for, on behalf of, or as representative for the othe is defined as agency. Agency theory explains the possible problems of between the agent and the principal. The agency theory and the public procurement offer a variety of problems at individual or several parties level such as bribes, corruption, illicit favors which are usually undocumented even in the developing and developed countries (Bhagwati & Desai, 1970). Corruption is an act of breaking the moral, social code or administrative regulations. The general awareness of corruption comes from the efforts of international and national agencies, NGOs, media, and the scandals of 1990s. The worldbank (2005) defined the corruption as the offering, giving, receiving, or soliciting of anything of value to influence the action of a public official in the procurement process or in contract execution. Especially, bribes and incentives are the most common kind of corruption. They have the most important impact on general public moral and hurt the middle and lower class of the society. (Ameh and Odusami, 2010; Jain, 2001). Accordingly, corruption is deeply studied using the agency model and resource allocation model. The agency model is used to explain behavior of legislator related to response to interest groups, collection of funds and especially the public procurement (Tanzi and Davoodi, 1997; Mauro, 1995). Resource allocation model however is more interested in explaining the corrupted behavior of entrepreneurs with the political elite to realize industrial, individual or organizational-interest (Jain, 2001). The way the public money is spent is the responsibility of the government and accordingly paying tax is a public duty but the tax morale; the individual s intrinsic motivation to comply with fiscal obligations is very influenced from the public procurements and investments. The attitude of taxpayer towards tax paying is the tax morale (Barone and Mocetti; 2011). The inefficiency in public spending surely affects the morale (Cummings, Martinez-Vazquez, McKee, & Torgler, 2009). The taxpayers perception of the legislative body has direct effect on tax paying attitude (Alm & Torgler, 2006). 3. Research Unofficial economy in any country is directly related to corruption and every measure of the corruption and its effect on taxpayer depends mainly on the perception. So, more clearer and useful input on these issues may be obtained through in-depth interviews to record the perceptions shared by the public procurers and professionnals. We use firm level and individual level approach to address this knowledge gap. We employed an in-depth semi-directed interviews with 6 director level employees, 6 company owners and 22 public employees to see the possible reasons in their attitude towards tax and the public procurement. The research focuses on how the perception of public procurement 3
affects the taxpayers attitudes, we explore the possible links and reasons to search for tax evasion and tax avoidance practices and shed light to the strength of good practices. The corruption any kind of rumour about corruption affects the government s moral authority and in many economies it starts the acts of noncompliance within the society. This makes it more difficult for governments to encourage the tax culture and trust towards government. The corruption is mainly related to public procurement as the governments try to have a more efficient public spending, the downturn in tax morale among public pushes them to do more with less which is not possible, owing to agency problems at multiple levels. However, transparency in the public spendings and procurement processes, increases the taxpayers propensity to pay taxes. Inefficiencies in the spending of public money is also as important as corruption, it may act as an external element to negatively affect the motivation of taxpayers to pay taxes. 4. Conclusion Our results show that it is corruption in public procurement that largely drives higher levels of tax avoidance and evasion; that is, corruption in the procurement processes is a significant determinant of taxpayers attitude in a firm or individual basis. The presence of any kind of rumor, claim or experience results in a search for tax avoidance or evasion. So, governments seeking to decrease tax evasion and avoidance must work first to ensure that they are well appreciated with their investments, services and procurement processes to better tax compliance levels. The results also show that a comprehensible and clear public procurement processes encourage individuals to comply and encourages them to influence other taxpayers to comply as they can easily see the benefits of paying tax and many other reasons even if the competition or living conditions are fierce. Buying or purchasing for the public interest is the public procurement. Governments collect revenue, in shape of taxes, duties, fee, surcharge for wellbeing of citizens. (Knight et al., 2007). However, they have multiple stakeholders and multi-level agency problems. These multiple agency problems may be surpassed if governments can showcase the transparent, judicious, and efficient utilization of public Money ase expected by the public. The transparency, access to information, and accountability in the process of consumption of taxpayers money are key factors affecting the taxpayers attitude and they play an important role in raising tax collection, by developing motivation in taxpayers, especially in developing and undeveloped economies. Existing measures of corruption are still insufficient and need development to enhance our understanding further. Similar searches in this area can help the understanding of the link between public procurement and tax paying attitude. 4
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