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Money and Taxes: The Relationship Between Financial Sector Development and Taxation

Author

Listed:
  • Tatom, John
  • Ott, Mack

Abstract

Requiring taxes to be paid in domestic money provides a legal tender basis for money demand and hence to the development of a financial system. In emerging markets, the level of taxation is a positive factor boosting financial development. At higher tax rates, however, taxation provides an incentive to reduce money demand and reduces the size of the financial sector. There is also evidence of re-switching in high-tax developed countries, where financial deepening increases with the tax rate. Such financial deepening represents a form of capital market repression, not unlike the growth-depressing effects of financial repression in many poor countries.

Suggested Citation

  • Tatom, John & Ott, Mack, 2006. "Money and Taxes: The Relationship Between Financial Sector Development and Taxation," MPRA Paper 4117, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:4117
    as

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    File URL: https://mpra.ub.uni-muenchen.de/4117/1/MPRA_paper_4117.pdf
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    References listed on IDEAS

    as
    1. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
    2. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    3. Selgin, George A, 1994. "On Ensuring the Acceptability of a New Fiat Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 808-826, November.
    4. Dan Kovenock, 2002. "Fiat Exchange in Finite Economies," Economic Inquiry, Western Economic Association International, vol. 40(2), pages 147-157, April.
    5. Kesselman, Jonathan R, 1993. "Evasion Effects of Changing the Tax Mix," The Economic Record, The Economic Society of Australia, vol. 69(205), pages 131-148, June.
    6. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
    7. Schneider, Friedrich, 1994. "Can the Shadow Economy Be Reduced through Major Tax Reforms? An Empirical Investigation for Austria," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 137-152.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Taxation; financial development; money demand; money multiplier; emerging markets;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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