Academic journal article The Journal of Developing Areas

Stock Market and Tax Revenue as Determinants of Economic Growth: Panel Data Evidence from Developing Asia

Academic journal article The Journal of Developing Areas

Stock Market and Tax Revenue as Determinants of Economic Growth: Panel Data Evidence from Developing Asia

Article excerpt

ABSTRACT

Traditional growth literature advocated the role of fiscal policy in establishing economic growth (Mckinnon, 1973; Schumpeter, 1911; Shaw, 1973; Solow, 1956; Zagler and Durnecker, 2003), but it did not consider the role of the stock market and the financial intermediation as the potential determinants of growth. Among those few economic theories explaining the stock market and taxation as joint determinants of the economic growth are the Levine's (1991) endogenous growth models (EGM), which suggests that economic growth is strongly influenced by the stock market and tax policy, and the Laffer - Khaldun curve, which demonstrates that reduced tax rates on investment income would stimulate economic growth which in turn generate more tax revenue and possibly even compensate for tax incentives given on investment. We investigate ten Developing Asia nations over the period 1990 to 2008. To study differences among the countries, the study sub-divides Developing Asia into East Asia Pacific (China, Thailand, Malaysia, Indonesia, Taiwan, Philippines) and South Asia (Bangladesh, India, Pakistan, Sri Lanka). Our motivation to choose these particular countries has been influenced by the rapid expansion of the stock markets and the rise in economic growth over the entire sample period. We employ panel unit root tests, Pedroni cointegration tests and panel Granger causality tests to estimate both short and long run causal relationships between stock market, tax revenue and economic growth. Data used included logged values of GDP to proxy economic growth, total tax revenue and stock market capitalization taken as a percentage of GDP to proxy tax revenue and stock market respectively. Findings provide evidence in support of Laffer-Khaldun curve and the Levine's (1991) EGM: stock market and tax revenue do have an impact on economic growth even though the impact might be somewhat small or in some cases even negative. This can be due to country- specific characteristics that make a successful transition from stock market and tax revenue to economic growth more difficult (i.e., corruption, difficulties in obtaining credit at the personal level, inflation). In the short run results demonstrate the existence of causal linkages (varying directions) for the countries in East Asia Pacific and South Asia. In the long run, for all the examined sub-samples the direction of relationship runs from i) economic growth and tax revenue to stock market; and ii) economic growth and stock market to tax revenue. For policy implementation, these results indicate that in order to promote economic growth, governments of ten Developing Asia should improve the channels between the stock market, taxation policy and economic growth by developing stock market liquidity and by identifying growth-oriented tax reform strategies.

JEL Classifications: G180, O160

Keywords: Cointegration, panel unit root tests, Asia, stock market, taxation, economic growth

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Does stock market together with fiscal policy affect economic growth? Prior empirical literature advocated the role of fiscal policy in establishing economic growth (Schumpeter, 1911, Solow, 1956, Mckinnon, 1973, Shaw, 1973, Zagler and Durnecker, 2003), but it made no attempt to investigate the role of the stock market and taxation as the potential determinants of growth. This is mainly because traditional growth theories concentrated on steady-state level of capital stock per worker or productivity, but not on the rate of economic growth which in turn was attributed to arise due to exogenous technical progress (Mohtadi and Agarwal, 2004). In contrast to traditional growth models, endogenous growth models (EGM) suggest that government taxation policies can affect the economic growth, and this effect can manifest not only in level but also affect the long run rate of growth (Lucas, 1990, Jones and Manuelli, 1990, Kim, 1997, Marsden, 1983). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.