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

Tatom, John and Ott, Mack (2006): Money and Taxes: The Relationship Between Financial Sector Development and Taxation.

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.

• Item Type: MPRA Paper
• Institution: Networks Financial institute at Indiana State University
• Language: English
• Keywords: Taxation; financial development; money demand; money multiplier; emerging markets
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

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