The nexus between tax reformation, financial development and economic recovery: the case of Malaysia


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.

Keyword : causality, economic growth, economic recovery, financial development, taxation, Malaysia

How to Cite
Taha, R., Šliogerienė, J., Loganathan, N., Jokšienė, I., Shahbaz, M., & Mardani, A. (2018). The nexus between tax reformation, financial development and economic recovery: the case of Malaysia. Technological and Economic Development of Economy, 24(3), 1258-1279.
Published in Issue
Jun 1, 2018
Abstract Views
PDF Downloads
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.


Abdullah, S., & Morley, B. (2014). Environmental taxes and economic growth: evidence from panel causality tests. Energy Economics, 42, 27-33.

Adeniyi, O., Oyinlola, A., Omisakin, O., & Egwaikhide, F. O. (2015). Financial development and economic growth in Nigeria: evidence from threshold modelling. Economic Analysis and Policy, 47, 11-21.

Adkisson, R. V., & Mohammed, M. (2014). Tax structure and state economic growth during the great recession. The Social Science Journal, 51, 79-89.

Adu, G., Marbuah, G., & Mensah, J. T. (2013). Financial development and economic growth in Ghana: does the measure of financial development matter? Review of Development Finance, 3, 192-203.

Agbloyor, E. K., Abor, J. Y., Adjasi, C. K. D., & Yawson, A. (2014). Private capital flows and economic growth in Africa: the role of domestic financial markets. Journal of International Financial Markets, Institutions and Money, 30, 137-152.

Aghion, P., Akcigit, U., Cagé, J., & Kerr. W. R. (2016). Taxation, corruption, and growth. European Economic Review, 86, 24-51.

Aizenman, J., & Pasricha, G. K. (2013). Why do emerging markets liberalize capital outflow controls? Fiscal versus net capital flow concerns. Journal of International Money and Finance, 39, 28-64.

Anwar, S., & Sun, S. (2011). Financial development, foreign investment and economic growth in Malaysia. Journal of Asian Economics, 22, 335-342.

Ariff, M., & Abu Bakar, S. Y. (1999). The Malaysian financial crisis: economic impact and recovery prospects. The Developing Economies, 37, 417-438.

Barro, R. J., & Sala-I-Martin, X. (1992). Public finance in models of economic growth. Review of Economic Studies, 59, 645-661.

Bhattacharyya, S., & Holder, R. (2014). Do natural resource revenues hinder financial development? The role of political institutions. World Development, 57(1), 101-113.

Blackburn, K., Bose, N., & Capasso, S. (2012). Tax evasion, the underground economy and financial development. Journal of Economic Behavior and Organization, 83, 243-253.

Bodman, P., Campbell, H., & Le, T. (2012). Public investment, taxation and long-run output in economies with multi-level governments. Economic Modelling, 19, 1603-1611.

Brock, W. A., Sheinkman, J. A., Dechert, W. D., & LeBaron, B. (1996). A test for independence base on the correlation dimension. Econometric Reviews, 15, 197-235.

Bujang, I., Abu Hakim, T., & Ahmad, I. (2013). Tax structure and economic indicators in developing and high income OECD countries: panel cointegration analysis. Procedia Economics and Finance, 7, 164-173.

Cavallari, L., & Romano, R. (2017). Fiscal policy in Europe: the importance of making it predictable. Economic Modelling, 60, 81-97.

Chen, K. C., Wu, L., & Wen, J. (2013). The relationship between finance and growth in China. Global Finance Journal, 24, 1-12.

Dergiades, T., Martinopoulos, G., & Tsoulfidis, L. (2013). Energy consumption and economic growth: parametric and non-parametric causality testing for the case of Greece. Energy Economics, 36, 686-697.

Diks, C., & Panchenko, V. (2006). A new statistic and practical guidelines for nonparametric Granger causality testing. Journal of Economic Dynamics and Control, 30, 1647-1669.

Feenberg, D. R., & Rosen, H. S. (1987). Tax structure and public sector growth. Journal of Public Economics, 32, 185-201.

Futagami, K., Morita, Y., & Shibata, A. (1993). Dynamic analysis of an endogenous growth model with public capital. Scandinavian Journal of Economics, 95, 607-625.

Goulas, E., & Zervoyianni, A. (2013). Growth, deficits and uncertainty: theoretical aspects and empirical evidence from a panel of 27 countries. The Quarterly Review of Economics and Finance, 53, 380-392.

Granger, C. W. J. (1969). Investigating causal relations by econometric models and cross spectral methods. Econometrica, 37, 424-438.

Hatfield, J. W. (2015). Federalism, taxation, and economic growth. Journal of Urban Economics, 87, 114-125.

Herfindahl, O. C. (1957). Tax policy for stability and growth. The American Economic Review, 47, 139-144.

Herwartz, H., & Walle, Y. M. (2014). Determinants of the link between financial and economic development: evidence from a functional coefficient model. Economic Modeling, 37, 417-427.

Ho, W. H., & Yang, C. C. (2013). Factor income taxation and growth with increasing integration of world capital markets. Economic Letters, 120, 477-480.

Hove, S., Tchana, F. T., & Mama. A. T. (2017). Do monetary, fiscal and financial institutions really matter for inflation targeting in emerging market economies? Research in International Business and Finance, 39, 128-149.

Hsueh, S. J., Hu, Y. H.; & Tu, C. H. (2013). Economic growth and financial development in Asian countries: a bootstrap panel Granger causality analysis. Economic Modeling, 32, 394-301.

Hye, Q. M. A., & Islam, F. (2012). Does financial development hampers economic growth: empirical evidence from Bangladesh. Journal of Business Economics and Management, 14, 558-582.

Jinjarak, Y. (2013). Economic integration and government revenue from financial repression. Economic Systems, 37, 271-283.

Kneller, R., Bleaney, M. F., & Gemmell, N. (1999). Fiscal policy and growth: evidence from OECD countries. Journal of Public Economics, 74, 171-190.

Kumar, S. (2017). New evidence on stock market reaction to dividend announcements in India. Research in International Business and Finance, 39, 327-337.

Lee, Y., & Gordon, R. H. (2005). Tax structure and economic growth. Journal of Public Economics, 89, 1027-1043.

Levine, R. (1991). Stock markets, growth and tax policy. The Journal of Finance, 46, 1445-1465.

Li, J. F., & Lin, Z. X. (2015). The impact of sales tax on economic growth in the United States: an ARDL bounds testing approach. Applied Economics Letter, 22(15), 1262-1266.

Lind, J. T., & Mehlum, H, (2010). With or without U? The appropriate for a U-shaped relationship. Oxford Bulletin of Economics and Statistics, 72(1), 109-118.

Loganathan, N., Taha, R., Ahmad, N., & Subramaniam, T. (2017). Taxation, growth and the stock traded nexus in emerging Asian countries: heterogeneous and semi-parametric panel estimates. Economic Research-Ekonomska istraživanja, 30(1), 566-580.

Madsen, J. B., & Ang, J. B. (2016). Finance-led growth in the OECD since the nineteenth century: how does financial development transmit to growth? Review of Economics and Statistics, 98, 552-572.

Menyah, K., Nazlioglu, S., & Worlde-Rufael, Y. (2014). Financial development, trade openness and economic growth in African countries: new insights from a panel causality approach. Economic Modelling, 37, 386-394.

Ministry of Finance Malaysia (2016). Economic Report 2015/2016. Retrieved from

Narayan, P. K., & Narayan, S. (2013). The short-run relationship between the financial system and economic growth: new evidence from regional panels. International Review of Financial Analysis, 29, 70-78.

Ngare, E., Nyamongo, E. M., & Misati, R. N. (2014). Stock market development and economic growth in Africa. Journal of Economic and Business, 74, 24-39.

Ojede, A., & Yamarik, S. (2012). Tax policy and state economic growth: the long-run and short-run of it. Economics Letters, 116, 161-165.

Oskooe, S. A. P. (2010). Emerging stock market performance and economic growth. American Journal of Applied Sciences, 7, 265-269.

Pesaran, M., Shin, Y., & Smith, R. (2001). Bound testing approaches to the analysis of level relationship. Journal of Applied Economics, 16, 289-326.

Peter, V. M., & Ker, I. A. (2001). The influence of tax mix and tax policy on savings and capital formation in developing economies: a survey. Asia-Pacific Development Journal, 8(1), 13-40.

Radu, D. I. (2012). Tax havens impact on the world economy. Social and Behavioral Sciences, 62, 398-402.

Romero-Ávila, D., & Strauch, R. (2008). Public finances and long-term growth in Europe: evidence from a panel data analysis. European Journal of Political Economy, 24, 172-191.

Schandlbauer, A. (2016). How do financial institutions react to a tax increase? Journal Financial Intermediation, 1-21.

Soli, V. O., Harvey, S. K., & Hagan, E. (2008). Fiscal policy, private investment and economic growth: the case of Ghana. Studies in Economics and Finance, 25, 112-130.

Stoilova, D. (2017). Tax structure and economic growth: Evidence from the European Union. Contaduría y Administración, 62(3), 1041-1057.

Tagkalakis, A. (2011). Asset price volatility and government revenue. Economic Modelling, 28, 2532-2543.

Taha, R., Colombage, S. R. N., Maslyuk, S., & Loganathan, N. (2013). Does financial system activity affect tax revenue in Malaysia? Bounds testing and causality approach. Journal of Asian Economics, 24, 147-157.

Thumrongvit, P., Kim, Y., & Pyun, C.S. (2013). Linking the missing market: the effect of bond markets on economic growth. International Review of Economics and Finance, 27, 529-541.

Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66, 225-250.

Uddin, G. S., Sjö, B., & Shahbaz, M. (2013). The causal nexus between financial development and economic growth in Kenya. Economic Modelling, 35, 701-707.

Widmalm, F. (2001). Tax structure and growth: are some taxes better than others? Public Choice, 107, 199-219.

World Bank. (2015). World development indicators. The World Bank: Washington D.C.

Yilmaz, E. (2013). Competition, taxation and economic growth. Economic Modelling, 35, 134-139.

Zhang, L., Ru, Y., & Li, J. (2016). Optimal tax structure and public expenditure composition in a simple model of endogenous growth. Economic Modelling, 59, 352-360.

Zhang, L., & Berzemer, B. (2016). Finance and growth in China, 1995–2013. More liquidity or more development? Cambridge Journal of Regions, Economy and Society, 9(3), 613-631.

Zimmermannova, J., Skalickova, J., & Siroky, J. (2016). what can tax revenues tell us about the economic activity of regions? Economics and Sociology, 9(1), 114-128.

Zivot, E., & Andrews, D. (1992). Further evidence on the great crash, the oil price shock and the unit root hypothesis. Journal of Business Economics Statistics, 10, 251-270.