WASHINGTON, August 18, 2014 — Transparency International just released its “Corruption Perceptions Index”(CPI) for 2014. This index surveys experts on public sector corruption in 177 countries. The US scored a 77 on the 0 to 100 scale. This places America 19th on the list.
Ten years ago we placed 14th. Why have we declined?
Every year I attend the annual conference of the World Association for Sustainable Development (WASD). The primary purpose of WASD is to transfer knowledge from developed countries to less developed countries.
For the past three or four conferences, a regular theme has been that the corruption prevalent in less than developed countries has had severely negative impacts on economic growth and development. Studies have shown that corruption increases income inequality and reduces spending on social programs. Always there is a question of what can be done to reduce corruption.
One reason that corruption occurs, particularly among government officials, is that the corrupt individual is able to gain financially by corrupt behavior. An individual weighs the benefits from being corrupt against the costs incurred if he is caught; when the probability of being caught is low and when the corrupt official receives little punishment even when convicted, the cost is low. High benefits relative to cost increase the likelihood of corruption.
Perhaps this explains why the U.S. is viewed as being much more corrupt today than it was 10 years ago. Increases in government involvement in economic activity will raise the benefits of corruption, so lead to its increased prevalence.
I have looked at the relationship between a number of variables and the Corruption Perception Index. Some of the correlations are interesting and may explain why the U.S. is now viewed as more corrupt.
For instance, as the personal income tax rate increases, corruption tends to increase. Similarly as government spending and total government tax revenue increased, corruption also increased.
The Index of Economic Freedom (IEF), published by the Heritage Foundation, ranks countries based on 10 measures of economic freedom, including variables like business freedom, investment freedom and property rights. Here are more significant relationships. As the IEF rises, meaning economies are more free and able to operate without regulation, the level of corruption falls dramatically.
Today Americans have the perception that corruption is increasing. Recent scandals strongly suggest this. We are constantly bombarded by stories concerning fraud with programs like Medicare and Medicaid where $60 to $90 billion is wasted annually. Additionally, there are abuses in other government programs like disability payments to people who are really able to work, or food stamp payments to people who spend the money on items other than food. Or welfare recipients who receive payments and who have died a number of years ago. Is there a solution?
If we reduce government involvement in economic activity, corruption will fall. That means reducing tax rates, reducing government spending (particularly on income maintenance programs), and increasing economic freedom by removing unnecessary and burdensome regulations.
Fixing tax rates is in principle a relatively simple problem. We just replace the current progressive, counter-productive and corruption encouraging federal income tax system with a single-rate (flat) tax of, say, 15 percent on all income above a livable minimum (perhaps two times the poverty rate). Leave absolutely no deductions for anything. All income — wages, rent, interest, profit, dividends and capital gains — is treated the same, no matter how it is earned, and no matter how it is spent.
This will raise about $200 billion more in revenue each year, likely add about 1/2 percent to long term GDP growth and increase GDP growth to more than 5 percent in the short term. It also dramatically reduces the incentive to be corrupt, while solving the tax inversion problem.
At the same time, government could reduce burdensome and counter-productive regulations. This would encourage business to expand by increasing the chance of success and again, reducing the incentive to be corrupt.
In the last five-and-a-half years, we have done just the opposite. Taxes have increased for virtually all Americans. Regulations have been piled onto businesses trying to grow and expand. And overall government involvement in economic activity has increased substantially. It is no wonder that corruption has increased.