Nexus between TaxRevenue and the Financial Sector in Emerging Markets

Abstract

This study investigated the influence of financial development on tax revenue in emerging markets using panel data (2005 – 2019). Secondly, the study explored the effect of the combination between financial development and trade openness on tax revenue during the same timeframe using econometric methods (pooled ordinary least squares, random effects, fixed effects, dynamic generalized methods of moments). Earlier empirical research on the topic produced mixed, inconclusive and contradictory results. It is against this backdrop that the author further investigated this topic to get a more definitive insight on the relationship between tax revenue and financial development in the context of emerging markets. The study noted that financial development had a significant positive impact on tax revenue under the fixed and random effects. Other factors which had a significant positive influence on tax revenue include trade openness (fixed and random effects), economic growth (fixed and random effects), urbanization (fixed and random effects), the lag of tax revenue (dynamic GMM) and the combination between trade openness and financial development (fixed and random effects). Emerging markets are encouraged therefore to formulate policies that enhances financial development, trade openness, urbanization and economic growth to stimulate tax revenue volumes. However, FDI (pooled OLS), population growth (fixed and random effects) and human capital development (dynamic GMM and pooled OLS) had a significant deleterious impact on tax revenue in emerging markets. Further research should focus on investigating the financial development threshold level beyond which tax revenue collection becomes significant in emerging markets.