Poor countries are usually encouraged to keep taxes low to attract business and drive up spending in the hopes of boosting growth. The Economist reported on a paper that indicated that this may lead to more corruption:

• Poor countries levy taxes equivalent to about 17% of GDP. In contrast the EU takes in 40% of GDP.
• The difference is often made up through foreign aid with Africa receiving $51 billion in 2012.
• The theory of loss aversion posits that people hate losing something they have more than they enjoy gaining something of equal value.
• Applied to economic development, it could lead to greater corruption in poor countries, since corrupt politicians are stealing foreign aid money rather than citizens’ hard earned taxes.
• If instead taxes were high and people saw their own money being wasted away, civic engagement may increase, and citizens may demand more accountability.

Read how this theory fared in a small scale experiment, and other details here.

Source: The Economist