The dynamic effects of growth, financial development and trade openness on tax revenue in Malaysia

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 of long-run relationship between tax revenue and per capita GDP and short-run relationship between tax collection, economic growth, financial development and trade openness. We found that there 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 emphasiss on dynamic fiscal policy targeting on tax reform and securing new sources of tax revenues to ensure continuous flow of long-term tax revenue coupled with sustainable economic growth, trade and financial performances in up-coming years.