The nexus between tax reformation, financial development and economic recovery: the case of Malaysia
Abstract
The main purpose of this paper is to establish the plausibility and the dynamic nexus between financial developments, economic growth and tax revenue in Malaysia. The analysis of these relationships is vital considering the instability of the global economy which has affected growth. In this study, we employed annual time series data covering the period of 1970–2015. Using advanced co-integration and causality analysis, we found strong evidence on the relationship between each of the examined variables. The results from this study provide evidence on the taxes-growth nexus for Malaysia. An inverted U-shaped relationship is found between financial development and tax collection, while a U-shape reflects the economic condition. The nexus between economic growth and tax revenue enhances fiscal policies in the creation of transparent and mature financial systems which will further boost the collection of government revenues in Malaysia. The results of this study may provide an avenue for researchers and policymakers to understand the nature of the relationship between the examined variables and further assist in the formulation of new policies for economic sustainability.
Keyword : causality, economic growth, economic recovery, financial development, taxation, Malaysia
How to Cite
Taha, R., Šliogerienė, J., Loganathan, N., Jokšienė, I., Shahbaz, M., & Mardani, A. (2018). The nexus between tax reformation, financial development and economic recovery: the case of Malaysia. Technological and Economic Development of Economy, 24(3), 1258-1279. https://doi.org/10.3846/tede.2018.1919
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Adkisson, R. V., & Mohammed, M. (2014). Tax structure and state economic growth during the great recession. The Social Science Journal, 51, 79-89. https://doi.org/10.1016/j.soscij.2013.10.009
Adu, G., Marbuah, G., & Mensah, J. T. (2013). Financial development and economic growth in Ghana: does the measure of financial development matter? Review of Development Finance, 3, 192-203. https://doi.org/10.1016/j.rdf.2013.11.001
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Aizenman, J., & Pasricha, G. K. (2013). Why do emerging markets liberalize capital outflow controls? Fiscal versus net capital flow concerns. Journal of International Money and Finance, 39, 28-64. https://doi.org/10.1016/j.jimonfin.2013.06.018
Anwar, S., & Sun, S. (2011). Financial development, foreign investment and economic growth in Malaysia. Journal of Asian Economics, 22, 335-342. https://doi.org/10.1016/j.asieco.2011.04.001
Ariff, M., & Abu Bakar, S. Y. (1999). The Malaysian financial crisis: economic impact and recovery prospects. The Developing Economies, 37, 417-438. https://doi.org/10.1111/j.1746-1049.1999.tb00241.x
Barro, R. J., & Sala-I-Martin, X. (1992). Public finance in models of economic growth. Review of Economic Studies, 59, 645-661. https://doi.org/10.2307/2297991
Bhattacharyya, S., & Holder, R. (2014). Do natural resource revenues hinder financial development? The role of political institutions. World Development, 57(1), 101-113. https://doi.org/10.1016/j.worlddev.2013.12.003
Blackburn, K., Bose, N., & Capasso, S. (2012). Tax evasion, the underground economy and financial development. Journal of Economic Behavior and Organization, 83, 243-253. https://doi.org/10.1016/j.jebo.2012.05.019
Bodman, P., Campbell, H., & Le, T. (2012). Public investment, taxation and long-run output in economies with multi-level governments. Economic Modelling, 19, 1603-1611. https://doi.org/10.1016/j.econmod.2012.05.002
Brock, W. A., Sheinkman, J. A., Dechert, W. D., & LeBaron, B. (1996). A test for independence base on the correlation dimension. Econometric Reviews, 15, 197-235. https://doi.org/10.1080/07474939608800353
Bujang, I., Abu Hakim, T., & Ahmad, I. (2013). Tax structure and economic indicators in developing and high income OECD countries: panel cointegration analysis. Procedia Economics and Finance, 7, 164-173. https://doi.org/10.1016/S2212-5671(13)00231-1
Cavallari, L., & Romano, R. (2017). Fiscal policy in Europe: the importance of making it predictable. Economic Modelling, 60, 81-97. https://doi.org/10.1016/j.econmod.2016.09.008
Chen, K. C., Wu, L., & Wen, J. (2013). The relationship between finance and growth in China. Global Finance Journal, 24, 1-12. https://doi.org/10.1016/j.gfj.2013.03.006
Dergiades, T., Martinopoulos, G., & Tsoulfidis, L. (2013). Energy consumption and economic growth: parametric and non-parametric causality testing for the case of Greece. Energy Economics, 36, 686-697. https://doi.org/10.1016/j.eneco.2012.11.017
Diks, C., & Panchenko, V. (2006). A new statistic and practical guidelines for nonparametric Granger causality testing. Journal of Economic Dynamics and Control, 30, 1647-1669. https://doi.org/10.1016/j.jedc.2005.08.008
Feenberg, D. R., & Rosen, H. S. (1987). Tax structure and public sector growth. Journal of Public Economics, 32, 185-201. https://doi.org/10.1016/0047-2727(87)90011-9
Futagami, K., Morita, Y., & Shibata, A. (1993). Dynamic analysis of an endogenous growth model with public capital. Scandinavian Journal of Economics, 95, 607-625. https://doi.org/10.2307/3440914
Goulas, E., & Zervoyianni, A. (2013). Growth, deficits and uncertainty: theoretical aspects and empirical evidence from a panel of 27 countries. The Quarterly Review of Economics and Finance, 53, 380-392. https://doi.org/10.1016/j.qref.2013.07.005
Granger, C. W. J. (1969). Investigating causal relations by econometric models and cross spectral methods. Econometrica, 37, 424-438. https://doi.org/10.2307/1912791
Hatfield, J. W. (2015). Federalism, taxation, and economic growth. Journal of Urban Economics, 87, 114-125. https://doi.org/10.1016/j.jue.2015.01.003
Herfindahl, O. C. (1957). Tax policy for stability and growth. The American Economic Review, 47, 139-144.
Herwartz, H., & Walle, Y. M. (2014). Determinants of the link between financial and economic development: evidence from a functional coefficient model. Economic Modeling, 37, 417-427. https://doi.org/10.1016/j.econmod.2013.11.029
Ho, W. H., & Yang, C. C. (2013). Factor income taxation and growth with increasing integration of world capital markets. Economic Letters, 120, 477-480. https://doi.org/10.1016/j.econlet.2013.05.024
Hove, S., Tchana, F. T., & Mama. A. T. (2017). Do monetary, fiscal and financial institutions really matter for inflation targeting in emerging market economies? Research in International Business and Finance, 39, 128-149. https://doi.org/10.1016/j.ribaf.2016.07.025
Hsueh, S. J., Hu, Y. H.; & Tu, C. H. (2013). Economic growth and financial development in Asian countries: a bootstrap panel Granger causality analysis. Economic Modeling, 32, 394-301. https://doi.org/10.1016/j.econmod.2013.02.027
Hye, Q. M. A., & Islam, F. (2012). Does financial development hampers economic growth: empirical evidence from Bangladesh. Journal of Business Economics and Management, 14, 558-582.
Jinjarak, Y. (2013). Economic integration and government revenue from financial repression. Economic Systems, 37, 271-283. https://doi.org/10.1016/j.ecosys.2012.10.003
Kneller, R., Bleaney, M. F., & Gemmell, N. (1999). Fiscal policy and growth: evidence from OECD countries. Journal of Public Economics, 74, 171-190. https://doi.org/10.1016/S0047-2727(99)00022-5
Kumar, S. (2017). New evidence on stock market reaction to dividend announcements in India. Research in International Business and Finance, 39, 327-337. https://doi.org/10.1016/j.ribaf.2016.09.009
Lee, Y., & Gordon, R. H. (2005). Tax structure and economic growth. Journal of Public Economics, 89, 1027-1043. https://doi.org/10.1016/j.jpubeco.2004.07.002
Levine, R. (1991). Stock markets, growth and tax policy. The Journal of Finance, 46, 1445-1465. https://doi.org/10.1111/j.1540-6261.1991.tb04625.x
Li, J. F., & Lin, Z. X. (2015). The impact of sales tax on economic growth in the United States: an ARDL bounds testing approach. Applied Economics Letter, 22(15), 1262-1266. https://doi.org/10.1080/13504851.2015.1023933
Lind, J. T., & Mehlum, H, (2010). With or without U? The appropriate for a U-shaped relationship. Oxford Bulletin of Economics and Statistics, 72(1), 109-118. https://doi.org/10.1111/j.1468-0084.2009.00569.x
Loganathan, N., Taha, R., Ahmad, N., & Subramaniam, T. (2017). Taxation, growth and the stock traded nexus in emerging Asian countries: heterogeneous and semi-parametric panel estimates. Economic Research-Ekonomska istraživanja, 30(1), 566-580. https://doi.org/10.1080/1331677X.2017.1305789
Madsen, J. B., & Ang, J. B. (2016). Finance-led growth in the OECD since the nineteenth century: how does financial development transmit to growth? Review of Economics and Statistics, 98, 552-572. https://doi.org/10.1162/REST_a_00513
Menyah, K., Nazlioglu, S., & Worlde-Rufael, Y. (2014). Financial development, trade openness and economic growth in African countries: new insights from a panel causality approach. Economic Modelling, 37, 386-394. https://doi.org/10.1016/j.econmod.2013.11.044
Ministry of Finance Malaysia (2016). Economic Report 2015/2016. Retrieved from http://www.treasury.gov.my/
Narayan, P. K., & Narayan, S. (2013). The short-run relationship between the financial system and economic growth: new evidence from regional panels. International Review of Financial Analysis, 29, 70-78. https://doi.org/10.1016/j.irfa.2013.03.012
Ngare, E., Nyamongo, E. M., & Misati, R. N. (2014). Stock market development and economic growth in Africa. Journal of Economic and Business, 74, 24-39. https://doi.org/10.1016/j.jeconbus.2014.03.002
Ojede, A., & Yamarik, S. (2012). Tax policy and state economic growth: the long-run and short-run of it. Economics Letters, 116, 161-165. https://doi.org/10.1016/j.econlet.2012.02.023
Oskooe, S. A. P. (2010). Emerging stock market performance and economic growth. American Journal of Applied Sciences, 7, 265-269. https://doi.org/10.3844/ajassp.2010.265.269
Pesaran, M., Shin, Y., & Smith, R. (2001). Bound testing approaches to the analysis of level relationship. Journal of Applied Economics, 16, 289-326. https://doi.org/10.1002/jae.616
Peter, V. M., & Ker, I. A. (2001). The influence of tax mix and tax policy on savings and capital formation in developing economies: a survey. Asia-Pacific Development Journal, 8(1), 13-40.
Radu, D. I. (2012). Tax havens impact on the world economy. Social and Behavioral Sciences, 62, 398-402. https://doi.org/10.1016/j.sbspro.2012.09.064
Romero-Ávila, D., & Strauch, R. (2008). Public finances and long-term growth in Europe: evidence from a panel data analysis. European Journal of Political Economy, 24, 172-191. https://doi.org/10.1016/j.ejpoleco.2007.06.008
Schandlbauer, A. (2016). How do financial institutions react to a tax increase? Journal Financial Intermediation, 1-21.
Soli, V. O., Harvey, S. K., & Hagan, E. (2008). Fiscal policy, private investment and economic growth: the case of Ghana. Studies in Economics and Finance, 25, 112-130. https://doi.org/10.1108/10867370810879438
Stoilova, D. (2017). Tax structure and economic growth: Evidence from the European Union. Contaduría y Administración, 62(3), 1041-1057. https://doi.org/10.1016/j.cya.2017.04.006
Tagkalakis, A. (2011). Asset price volatility and government revenue. Economic Modelling, 28, 2532-2543. https://doi.org/10.1016/j.econmod.2011.07.015
Taha, R., Colombage, S. R. N., Maslyuk, S., & Loganathan, N. (2013). Does financial system activity affect tax revenue in Malaysia? Bounds testing and causality approach. Journal of Asian Economics, 24, 147-157. https://doi.org/10.1016/j.asieco.2012.11.001
Thumrongvit, P., Kim, Y., & Pyun, C.S. (2013). Linking the missing market: the effect of bond markets on economic growth. International Review of Economics and Finance, 27, 529-541. https://doi.org/10.1016/j.iref.2013.01.008
Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66, 225-250. https://doi.org/10.1016/0304-4076(94)01616-8
Uddin, G. S., Sjö, B., & Shahbaz, M. (2013). The causal nexus between financial development and economic growth in Kenya. Economic Modelling, 35, 701-707. https://doi.org/10.1016/j.econmod.2013.08.031
Widmalm, F. (2001). Tax structure and growth: are some taxes better than others? Public Choice, 107, 199-219. https://doi.org/10.1023/A:1010340017288
World Bank. (2015). World development indicators. The World Bank: Washington D.C.
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