Impact of Corruption on Foreign Direct Investment, Tax Revenues and Trade in Afghanistan: An Empirical Examination and Literature Review

Karokhi, Somaya and Rasa, Mohammad Mirwais (2020): Impact of Corruption on Foreign Direct Investment, Tax Revenues and Trade in Afghanistan: An Empirical Examination and Literature Review.

Abstract

Using Transparency International’s Corruption Perceptions Index (CPI), this study establishes a statistically significant link between CPI and foreign direct investment (FDI) in Afghanistan. In addition to each country’s CPI, several location and economic characteristics are also postulated to influence FDI. For 2003- 2019 in Afghanistan, the paper then simulates the impact of an improvement in the CPI score on FDI. This simulation shows that a one-point improvement in CPI would generate on average additional FDI of 0.5% of GDP. The paper further simulates the effects of larger FDI on the generation of taxable income and tax revenues in Afghanistan using year’s specific rates of return on Afghanistan investment and the highest marginal corporate tax rate in Afghanistan. This simulation shows that a three-point improvement in CPI would more than double the corporate tax take on average with the biggest beneficiaries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade, Corruption, FDI, Tax Revenues, Afghanistan
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E26 - Informal Economy ; Underground Economy; F - International Economics > F2 - International Factor Movements and International Business > F24 - Remittances

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