Tax Revenue and Financial Development: Theory and Evidence

This dissertation consists of three related essays which investigate different mechanisms for tax enforcement and collection. The objective of the dissertation is to theoretically and empirically examine what influences the ability of the government to raise tax revenue. In the first chapter I examine the role of the financial sector, specifically banks, as a mechanism for tax enforcement and collection. I explore the hypothesis that the public sector, measured by the tax-to-GDP ratio, co-emerges with the banking sector, measured by deposits-to-GDP, during the course of economic development. I examine this hypothesis theoretically, tracing out various paths along which the banking and public sectors might co-emerge due to changes in tastes or technology. I then test it empirically, using panel data on 116 countries over the period 1990-2008. Evidence supports the hypothesis. In the second chapter, I further investigate the mechanisms for tax enforcement and collection. Specifically, I investigate the impact of stock markets on the level of tax revenue. Using a panel data set of 96 countries over the period 1990-2008 I find that stock markets positively influence government\u27s ability to raise tax revenue. When compared to the effect of bank deposits, however, I find that the banking sector has a greater explanatory power consistent with the paper of Gordon and Li (2009). The third and final chapter considers the impact of financial liberalization on tax revenue as a share of GDP. I test the hypothesis empirically, using panel data on 126 countries over the period 1990-2008. I find that capital account openness positively impacts the level of tax revenue. More specifically, the impact of financial liberalization is predominant in countries where the depth of the banking sector is greater