Stock market, tax revenue and economic growth: A case-study of Malaysia

This paper empirically tests Levine's [1] endogenous growth model, which suggests that stock market and tax policy jointly affect economic growth. Following Levine [1], tax or impeding financial market activities have the potential to lower per capita growth rate. Using monthly data from 1980 to 2008, the relationship between tax revenue, stock market as proxies by direct tax revenue and KLCI respectively and economic growth in Malaysia is modeled using the Granger causality and VECM framework. Results support Levine's theory and reveal that over the sample period both tax revenue and stock market affect pattern of economic growth in Malaysia. These findings indicate that strong growth can be achieved through booming of stock market activities and the high revenue collection. Fiscal policy authorities in Malaysia will find these results useful.