Tax reform, inflation, financial development and economic growth in Malaysia

Abstract

This study explores the dynamic linkage between financial development, inflation and economic growth on tax revenue condition for Malaysia. The Maki’s cointegration test with various structural breaks, bootstrap rolling window causality applications and the Lind and Mehlum (2010) estimation to capture the U-shape condition of tax-led-growth fundamental theory used in this study.The major finding using quadratic estimates indicates an inverted U-shape effect between the economic growths towards the tax revenue. When discussing about the full sample causality analysis, we found that there is unidirectional causality running between taxation with financial development and inflation; and there is also a unidirectional causality running from GDP to taxation. Furthermore, by using the bootstrap rolling window causality, we found numerous sup-period predictive powers of causalities running between taxation, financial development, inflation and economic growth. Overall, the findings indicate a growth-led-taxation effect in Malaysia due to the inverted U-shape effect appeared in this study.