This study aims to examine whether the state-level political corruption environment influences the federal tax compliance behavior of the state’s residents. By integrating cultural and institutional trust frameworks, the authors argue that corruption not only shapes state governance but also promotes norms that may weaken citizens’ willingness to comply with federal tax law. Given that taxes are necessary to support governments, understanding how state and local culture may contribute to federal tax fraud is important.
The authors collect data from 1998 to 2022 on corruption and tax fraud convictions for all 50 states and use pooled ordinary least squares regressions to estimate the relationship between state-level corruption conviction rates and tax fraud conviction rates. The authors test the robustness of their findings using alternative measures and model specifications.
The results show that states with higher corruption conviction rates also have higher rates of tax fraud convictions. This positive association remains statistically significant across all robustness tests.
This study extends prior work on corruption and taxation by focusing on how state-level political corruption can influence federal tax compliance. Whereas prior research centers on corporate tax avoidance, this analysis examines criminal convictions for taxpayer fraud. To the best of the authors’ knowledge, this is the first study to empirically link state-level political corruption to federal tax fraud. The findings suggest that corruption may foster unethical cultural environments that weaken tax morale and reduce federal tax compliance.
