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

  • Tatom, John
  • Ott, Mack

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.

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File URL: http://mpra.ub.uni-muenchen.de/4117/1/MPRA_paper_4117.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4117.

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Date of creation: 10 Oct 2006
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Handle: RePEc:pra:mprapa:4117
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  1. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  2. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
  3. Kovenock, D. & de Vries, C.G., 1995. "Fiat Exchange in Finite Economies," UFAE and IAE Working Papers 310.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Kesselman, Jonathan R, 1993. "Evasion Effects of Changing the Tax Mix," The Economic Record, The Economic Society of Australia, vol. 69(205), pages 131-48, June.
  5. Nouriel Roubini & Xavier Sala-i-Martin, 1991. "Financial Repression and Economic Growth," NBER Working Papers 3876, National Bureau of Economic Research, Inc.
  6. 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 137-52.
  7. Selgin, G., 1993. "On Ensuring the Acceptability of a New Fiat Money," Papers 368, Georgia - College of Business Administration, Department of Economics.
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