The news is currently filled with stories of corruption.
A global group of media outlets just broke the story of secret offshore bank accounts in Panama, which suggests widespread corruption in the Russian government and elsewhere. For months, stories of the Brazilian government’s bribery scandal have filled the news. Other headline-grabbing events include Malaysia’s prime minister allegedly siphoning almost a billion dollars from a state development fund.
Many stories focus on the politics of corruption. The Economist magazine even has an entire section devoted to political corruption. Some stories focus on the exact details of how corrupt money flows around the world, such as a recent Wall Street Journal story on how Malysia’s missing funds actually paid for the movie “The Wolf of Wall Street.”
Corruption is ethically wrong and is illegal in most countries. For example, the United States has laws such as the Foreign Corrupt Practices Act that clearly states people in business should not bribe, cheat, or steal when doing business.
Few of the news stories, however, explain in simple economic terms why corruption is so bad.
Corruption Is Another Tax
In economic terms, bribery is simply another government tax.
Imagine a store owner who pays a set tax each year. Now imagine each year the store owner also needs to bribe local officials for an operating permit. The tax plus the bribe affects the store’s bottom line the same as simply being taxed once by the government at a higher amount.
In general, taxes discourage business. When costs go up without a change in revenue, profits fall. If profits fall so low as to disappear, the reason for being in business goes away.
In simple terms corruption and bribery reduce the economic incentive to produce. This lowers a country’s output and drags down the entire nation’s standard of living. Bribes result in a smaller economic pie because businesses don’t expand resulting in fewer jobs, smaller legitimate tax revenue, and lower output for everyone.
