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How does financial sector development improve tax revenue mobilization for developing countries?

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  • AGUIMA AIME BERNARD LOMPO

    (CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)

Abstract

This study examines the effect of financial development on tax revenue mobilization in developing countries. Our empirical analysis uses the aggregate financial index that comprises the banking system's depth (size and activity), access, and efficiency of financial institutions and financial markets. Using panel data from developing countries over the period 1995-2017, our findings suggest that more developed financial sectors positively and significantly influence the government's ability to raise tax revenue. More interestingly, we find that this favorable effect is sensitive to developing countries characteristics, namely the level of economic development, the degree of financial openness and the stance of fiscal policies. When we more precisely look at the effects of disaggregated financial development components on tax revenues mobilization, we find that the estimated coefficients on the sub-components of financial development are statistically significant, except for the financial market's efficiency. The results denote that tax revenue in developing countries depends on financial institutions and financial markets.

Suggested Citation

  • Aguima Aime Bernard Lompo, 2023. "How does financial sector development improve tax revenue mobilization for developing countries?," Post-Print hal-03980743, HAL.
    • Handle: RePEc:hal:journl:hal-03980743
    DOI: 10.1057/s41294-023-00207-9
    Note: View the original document on HAL open archive server: https://uca.hal.science/hal-03980743
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    Keywords

    Financial development; Non-resource tax revenue; Domestic tax revenue; Developing countries;
    All these keywords.

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