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

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  • 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
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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

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    7. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
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    Cited by:

    1. Ott, Mack & Tatom, John, 2015. "Government Finance and the Demand for Money - the Relationship Between Taxation and the Acceptability of Fiat Money," Studies in Applied Economics 37, The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.
    2. Téllez-León, Isela Elizabeth & Venegas-Martínez, Francisco, 2019. "Determinants of Financial Deepening in Mexico: A Dynamic Panel Data Approach || Determinantes de la Profundad Financiera en México: Un Enfoque de Datos De Panel Dinámico," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 27(1), pages 285-299, June.

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    More about this item

    Keywords

    Taxation; financial development; money demand; money multiplier; emerging markets;
    All these keywords.

    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; Modern Monetary Theory

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