The Dynamic Effects of Growth, Financial Development and Trade Openness on Tax Revenue in Malaysia

  • Nanthakumar Loganathan Universiti Teknologi Malaysia
  • Norsiah Ahmad Universiti Sultan Zainal Abidin
  • Thirunaukarasu Subramaniam University of Malaya
Keywords: Economic, Growth, Financial development, Rolling windows, Taxation, Trade openness

Abstract

This study explores the effects of domestic financial development, growth and trade openness on tax collection for Malaysia using the ARDL and bootstrap rolling window estimates covering the period 1970-2017. The empirical results suggest that, the presence oflong-run relationship between tax revenue and per capita GDP and short-run relationship between tax collection, economic growth, financial development and trade openness. We foundthatthere is a short-run unidirectional causality running between tax collection, economic growth and financial development. This result suggests that, in the long-run, economic performance and financial development have an adverse effect on tax collection, while trade openness has no significant causality impact on tax collection in Malaysia. Based on the empirical results of the study, the country should pay more attention to enhance the effectiveness of future public expenditure programs and put more emphasisson dynamic fiscal policy targeting on tax reform and securing new sourcesof tax revenues to ensure continuous flow of long-term tax revenue coupled with sustainable economic growth, trade and financial performances in up-coming years.

References

Abdullah, S., & Morley, B. (2014). Environmental taxes and economic growth: Evidence from panel causality tests. Energy Economics, 42, 27-33.

Adkisson, R. V., & Mohammed, M. (2014). Tax structure and state economic growth during the great recession. The Social Science Journal, 51(1), 79-89.

Afonso, A., & Sousa, R. M. (2011). What are the effects of fiscal policy on asset markets? Economic Modelling, 28(4), 1871-1890.

Agbeyegbe, T. D., Stotsky J., & Wolde Mariam, A. (2006). Trade liberalization, exchange rate changes and tax revenue in Sub-Saharan Africa. Journal of Asian Economics, 17(2), 261-284.

Aghion, P., Akcigit, U., Cage, J., & Kerr, W. R. (2016). Taxation, Corruption and Growth. Harvard Business School Working Paper No. 16-075.

Albertazzi, U., & Gambocorta, L. (2010). Bank profitability and taxation. Journal of Banking and Finance, 4(11), 2801-2810.

Arnold, J. M., Brys, B., Heady, C., Johansson, A., Scwellnus, C., & Vartia, L. (2011). Tax policy for economic recovery and growth. The Economic Journal, 121(550), 59-80.

Atems, B. (2016). Another look at a tax policy and state economic growth: The long-run and shortrun of it. Economics Letters, 127, 64-67.

Balcilar, M., Ozdemir, Z. A., & Arslanturk, Y. (2010). Economic growth and energy consumption causal nexus viewed through a bootstrap rolling window. Energy Economics, 32(6), 1398-1410.

Bank Negara Malaysia. (2012). Economic Developments in 2012: Bank Negara Malaysia Annual Report 2012. Kuala Lumpur: Bank Negara Malaysia.

Barro, R. J. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(5), 103-125.

Baunsgaard, T., & Keen, M. (2010). Tax revenue and (or?) trade liberalization. Journal of Public Economics, 94(9-10), 563-577.

Bierbrauer, F. (2014). Tax incidence for fragile financial markets. Journal of Public Economics, 120, 107-125.

Chandran, V. G. R., & Munusamy, A. (2009). Trade openness and manufacturing growth in Malaysia. Journal of Policy Modeling, 31(5), 637-647.

Chatziantoniou, I., Duffy, D., & Filis, G. (2013). Stock market response to monetary and fiscal policy shocks: Multi-country evidence. Economic Modelling, 30, 754-769.

Chen, P., Chu, A. C., Chu, H., & Lai, C. (2017). Short-run and long-run effects of capital taxation on innovation and economic growth. Journal of Macroeconomics, 53, 207-221.

Choi, Y., & Kim, S. (2016). Dynamic scoring of tax reforms in a small open economy model. Economic Modelling, 58, 182-193.

Dickey, D., & Fuller, W. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4), 1057-1072.

Dornean, A., & Oanea, D. C. (2015). Romanian fiscal policy sustainability during financial crisis: A cointegration approach. Procedia Economics and Finance, 20, 163-170.

Durusu-Ciftci, D., Gokmenoglu, K. K., & Yetkiner, H. (2018). The heterogeneous impact of taxation on economic development: New insights from a panel cointegration approach. Economic Systems, 42(3), 503-513.

Erosa, A., & Gonzalez, B. (2019). Taxation and the life cycle of firms. Journal of Monetary Economics, 105, 114-130.

Fricke, H., & Süssmuth, B. (2014). Growth and volatility of tax revenues in Latin America. World Development, 5, 114-138.

Gaalya, M. S. (2015). Trade liberalization and tax revenue performance in Uganda. Modern Economy, 6(2), 228-244.

Gilbert, S., & Ilievski, B. (2016). Banks, development and tax. The Quarterly Review of Economics and Finance, 61, 1-13.

Haque, M. E., & Mukherjee, A. (2005). On the revenue implications of trade liberalization under imperfect competition. Economics Letters, 88(1), 27-31.

Hisali, E. (2012). Trade Policy Reform and international trade tax revenue in Uganda. Economic Modelling, 29(6), 2144-2154.

Honohan, P., & Klingebiel, D. (2003). The fiscal cost implications of an accommodating approach to banking crises. Journal of Banking & Finance, 27(8), 1539-1560.

Jha, P., & Gozgor, G. (2019). Globalization and taxation: Theory and evidence. European Journal of Political Economy, 59, 296-315.

Kate, F., & Milionis, P. (2019). Is capital taxation always harmful for economic growth? International Tax and Public Finance, 1-48.

Li, X. L., Balcilar, M., Gupta, R., & Chang, T. (2016). The causal relationship between economic policy uncertainty and stock returns in China and India: Evidence from a bootstrap rolling window approach. Emerging Markets Finance and Trade, 52(3), 674-689.

Lim, M., & Goh, S. (2012). How Malaysia weathered the financial crisis: Policies and possible lessons in how to prevent the next crisis: Lessons from country experiences of the global financial crisis. The North-South Institute, pp. 1-20.

Mahdavi, S. (2008). The level and composition of tax revenue in developing countries: Evidence from unbalanced panel data. International Review of Economics and Finance, 17(4), 607-617.

Maki, D. (2012). Tests for cointegration allowing for an unknown number of breaks. Economic Modelling, 29(5), 2011-2015.

Marrero, G. A., & Novales, A. (2011). Growth, income taxes and consumption aspirations. Economics Letters, 113(3), 221-224.

Mujumdar, S. (2004). Revenue implications of trade liberalization under imperfect competition. Economics Letters, 82(1), 83-89.

Nwosa, P. I., Saibu, M. O., & Fakunle, O. O. (2012). The effect of trade liberalization on trade tax revenue in Nigeria. African Economic and Business Review, 10(2), 28-43.

Nyblom, J. (1989). Testing for the constancy of parameters over time. Journal of the American Statistical Association, 84(405), 223-230.

Ojede, A., & Yamarik, S. (2012). Tax policy and state economic growth: The long-run and shortrun of it. Economics Letters, 116(2), 161-165.

Perron, P. (1997). Further evidence on breaking trend functions in macroeconomic variables. Journal of Econometric, 80(2), 355-385.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationship. Journal of Applied Econometrics, 16(3), 289-326.

Samargandi, N., Fidrmuc, J., & Ghosh, S. (2015). Is the relationship between financial development and economic growth monotonic? Evidence from sample of middle-income countries. World Development, 68, 66-81.

Shukur, G., & Mantalos, P. (2000). A Simple Investigation of the Granger Causality in Integrated-Cointegrated VAR System. Sweden: Working Paper University of Lund.

Tagkalakis, A. (2011). Fiscal policy and financial market movements. Journal of Banking & Finance, 35(1), 231-251.

Tagkalakis, A. (2013). The effects of financial crisis on fiscal positions. European Journal of Political Economy, 29, 197-213.

Uddin, G. S., Sjo, B., & Shahbaz, M. (2013). The causal nexus between financial development and economic growth in Kenya. Economic Modelling, 35, 701-707.

World Bank. (2018). World Development Indicators. Retrieved from http://data.worldbank.org/data-catalog/world-development-indicators.

Yong, L. Y., Yahya, M. H., Amin Noordin, B. A., & Selamat, A. I. (2019). The effect of goods and services tax (GST) imposition on stock market overreaction and trading volume in Malaysia and Australia. Jurnal Pengurusan, 55, 73-84.

Zhixin, Z., & Ya, L. (2011). The impact of carbon tax on economic growth in China. Energy Procedia, 5, 1757-1761.

Published
2020-03-26
How to Cite
Nanthakumar Loganathan, Norsiah Ahmad, & Thirunaukarasu Subramaniam. (2020). The Dynamic Effects of Growth, Financial Development and Trade Openness on Tax Revenue in Malaysia. International Journal of Business and Society, 21(1), 42-62. https://doi.org/10.33736/ijbs.3222.2020