International Journal of New Political Economy

International Journal of New Political Economy

Governance Quality, Informality, and Sustainable Tax Capacity in BRICS: A Panel Mediation Analysis

Document Type : Original Article

Author
Associate Professor in Economics, Department of Economics, Gonbad Kavous University, Gonbad Kavous, Iran
Abstract
This study investigates whether governance quality enhances sustainable tax revenue by reducing the size of the informal economy, an underexplored transmission channel in emerging economies. Focusing on BRICS countries (Brazil, Russia, India, China, South Africa) over 2000–2023, we integrate the Quality of Government framework, Agency Theory, and the fiscal social contract perspective to propose a mediation model in which stronger institutions lower informality, thereby broadening the tax base. Using an unbalanced panel, we employ counterfactual causal mediation analysis via fixed-effects regressions and bootstrapping, complemented by dynamic system GMM to address sequential ignorability and endogeneity. After controlling for GDP per capita, inflation, unemployment, financial inclusion, and digital payments, governance quality exhibits a significant positive direct effect on tax revenue and a significant negative effect on informality. The indirect effect through informality is 0.317, confirming partial mediation. Furthermore, digital financial inclusion strengthens the governance–formalization link, evidence of moderated mediation. These findings extend the governance–tax literature by demonstrating that formalization is a critical mechanism, especially where informality is pervasive. Policy strategies should therefore sequence institutional reforms with formalization incentives and digital infrastructure development to maximize fiscal capacity.
Keywords

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Volume 7, Issue 2
August 2026

  • Receive Date 29 May 2026
  • Revise Date 04 August 2026
  • Accept Date 22 August 2026
  • First Publish Date 22 August 2026
  • Publish Date 01 August 2026