Money and Taxes - The Relation Between Financial Sector Development and Taxation

Mack Ott and John Tatom

No 2006-WP-09, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

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)
Pages: 39 pages
Date: 2006-10
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Citations: View citations in EconPapers (2)

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