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Does financial system activity affect tax revenue in Malaysia? Bounds testing and causality approach


  • Taha, Roshaiza
  • Colombage, Sisira R.N.
  • Maslyuk, Svetlana
  • Nanthakumar, Loganathan


We provide new empirical evidence on the relationship among direct tax revenue and banking and non-banking activities in Malaysia's financial system, utilising monthly data for the period 1997–2008. The existence of the long run equilibrium relationship between tax revenue and the financial system was investigated using the autoregressive distributive lag (ARDL) bounds testing approach to cointegration. We find a long-run equilibrium relationship between the financial system and tax revenue in Malaysia. The short-run dynamic relationship between direct tax revenue and financial system was investigated using the vector error correction model (VECM). The estimated ECTt−1 coefficient indicates a relatively fast speed of adjustment from short-run disequilibrium to long-run equilibrium. The Granger causality tests reveal unidirectional causality running from stock market towards direct tax revenue, indicating that an increase in stock market activities is likely to improve the collection of direct tax revenue. Overall, we show that the impact of the financial system on direct tax revenue is more profound in the short run than in the long run.

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  • Taha, Roshaiza & Colombage, Sisira R.N. & Maslyuk, Svetlana & Nanthakumar, Loganathan, 2013. "Does financial system activity affect tax revenue in Malaysia? Bounds testing and causality approach," Journal of Asian Economics, Elsevier, vol. 24(C), pages 147-157.
  • Handle: RePEc:eee:asieco:v:24:y:2013:i:c:p:147-157 DOI: 10.1016/j.asieco.2012.11.001

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    References listed on IDEAS

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    More about this item


    Tax revenue; Banking sector; Bound testing; Causality; Non-banking sector;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy


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