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

John Tatom and Mack Ott

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Taxation; financial development; money demand; money multiplier; emerging markets (search for similar items in EconPapers)
JEL-codes: E62 H2 O16 (search for similar items in EconPapers)
Date: 2006-10-10
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pbe
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:4117

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