Impact of Economic and Financial Factors on Tax Revenue Evidence From South Asia

Abstract

Funds are imperative to meet governments' goals. Several economic and financial variables influence these funds and the country's internal revenue generation policy. Only a few studies focus on the impact of economic and financial factors on tax revenue. No research paper has been conducted that considers South Asia for panel study. This paper studies the impact of economic and financial aspects on tax revenue in the case of South Asia for the period from 1980 to 2019. The study uses Panel ARDL and WALD tests to check the specification. The study finds that financial variables impact tax revenue positively. GDP per capita has a long-run positive relationship with tax revenue, whereas per capita income relates negatively in the short run. According to the study's outcomes, financial variables such as M2 (Broad Money), Manufacturing Value Added, and DFPS (Domestic Finance to Private Sector) positively affect tax revenue. Economic variable as GDP per capita has a positive relationship with tax revenue, whereas official development assistance, trade openness, and urbanization negatively affect tax revenue. The study finds that the higher indirect tax causes a negative relationship between tax revenue and national income. It posits that stable financial institutions, equivalence growth, a substantial money market, and a progressive tax system could help the economy generate more rewarding revenue generation activity. Developing countries heavily rely on indirect taxation, which incidents on the poor, creates disparity, enforces regressive taxation, and ultimately, it hampers Economic Growth. Therefore, the paper suggests efficient taxation and a higher portion of direct tax, which could be an effective macroeconomic policy.
Keywords: Tax Revenue, Economic Factors, Financial Factors