Nonlinear impact of financial inclusion on tax revenue: evidence from the Monte-Carlo simulation algorithm under the Bayesian approach

Abstract

Purpose

This article aims to study the nonlinear effect of financial inclusion on tax revenue of 21 low financial development countries (LFDCs) and 22 high financial development countries (HFDCs) from 2004 to 2020.

Design/methodology/approach

The study calculates the world average financial development index (FD̅) for all countries using data from the IMF. The average FD of HFDCs is higher than (FD̅). On the other hand, the average FD of LFDCs is lower than (FD̅). Data of 21 LFDCs and 22 HFDCs cover the period 2004–2020. With the small sample problem, we applied the Bayesian method to examine the nonlinear effect of financial inclusion on the tax revenue of the two groups of countries.

Findings

Using the Bayesian method, the results show that financial inclusion negatively impacts tax revenue with an absolute probability of 100% in LFDCs and a lower probability of 92.45% in HFDCs. Additionally, the financial inclusion threshold at LFDCs is 18.90. Below this threshold, financial inclusion promotes tax revenue with a 100% probability. On the contrary, when financial inclusion exceeds the threshold, it will have a negative effect on tax revenue. Similarly, the financial inclusion threshold at HFDCs is 20.14, with a probability of 92.45%.

Originality/value

To the best of the authors’ knowledge, this is the first paper to examine the nonlinear impact of financial inclusion on tax revenue in high and low financial development countries.