Financial Development and Tax Revenue Nexus in Turkey

Abstract

This study explores the nexus between financial development (banking and non-banking) and direct tax revenue in a multivariate framework in Turkey for the period 2006 to 2014, employing monthly data. We examined the long run equilibrium relationship between financial development and tax revenue using two different co-integration tests namely Johansen and Juselius (1990), and Hatemi-J (2008). The results of the co-integration tests indicate that direct tax revenue and financial development are co-integrated. The Vector Error Correction Model (VECM) used to investigate the short run and long-run dynamic relationship between financial development and direct tax revenue. The results reveal that banking and non-banking financial development Granger cause direct tax revenue in the long run. Only the banking sector Granger causes direct tax revenue in the short run.