Graft is where: 1) The politicians steal your money for their own personal use so it doesn't get into the treasury 2) People (or companies) bribe treasury officials to not tax them at the proper tax rate 3) People (or companies) simply don't pay their taxes |
First off, "graft" is a slang or jargon term, not a formal one, so meaning is fundamentally fuzzy. Plus, from what I can tell, the GCII math is really about corruption in general and not graft in particular. Revenue that goes into any "black market" context like that is lost to the legal system.
Re point 1, that's just stealing--graft is a mutual arrangement. Same thing applies to point 3, that's just cheating on taxes. Re point 2, graft affects far more than just treasury officials--many cops are on the take, as are health inspectors, labor union officials, etc.
Put somewhat differently, the econ penalty in GCII is a very plausible attempt at modeling the results of extremely large, relatively open economies (we've talked elsewhere about GCII's weakness re assuming everything in a galaxy full of aliens works from an Adam Smith world view). Regardless of my desire to see more sophistication (differentiation) in species economic models, I really like this "graft" penalty now that I've come to understand it.