Institutional Quality and Illicit Capital Outflow: A Comparative Analysis of the Eastern European Countries

Abstract

It is estimated that $1 trillion flows out of the developing and emerging economies illegally on a yearly basis. This affects the ability of governments to raise the tax revenue and deprive the citizens of crucial services. Multinational Corporations (MNCs), as one of the big player in the global economy, are suspected to play a role in those capital outflows. For the multinational, the outflows enable strategic allocation pf taxes as a mean to enhance profits. This study tests whether institutional quality and tax level are significant predictors of the illicit capital outflow. The analysis uses panel data regressions on a group of Eastern European countries for the years 2004-2013. Empirical evidence suggests that illicit capital outflow reduces with institutional quality and increases with the tax level. We speculate on the importance of cross-country coordination actions to improve the quality of the institutions not only domestically but also at the supranational level.