THE NEXUS BETWEEN TAX REFORMATION, FINANCIAL DEVELOPMENT AND ECONOMIC RECOVERY: THE CASE OF MALAYSIA

Abstract

The main purpose of this paper is to establish the plausibility and the dynamic nexus between financial developments, economic growth and tax revenue in Malaysia. The analysis of these relationships is vital considering the instability of the global economy which has affected growth. In this study, we employed annual time series data covering the period of 1970–2015. Using advanced co-integration and causality analysis, we found strong evidence on the relationship between each of the examined variables. The results from this study provide evidence on the taxes-growth nexus for Malaysia. An inverted U-shaped relationship is found between financial development and tax collection, while a U-shape reflects the economic condition. The nexus between economic growth and tax revenue enhances fiscal policies in the creation of transparent and mature financial systems which will further boost the collection of government revenues in Malaysia. The results of this study may provide an avenue for researchers and policymakers to understand the nature of the relationship between the examined variables and further assist in the formulation of new policies for economic sustainability.