International Journal of New Political Economy

International Journal of New Political Economy

Indirect Effects of Financial Inclusion on Tax Revenue in Selected Developing and Developed Countries

Articles in Press

Document Type : Original Article

Authors
Fahmideh Fattahi 1
Samad Hekmati Farid 2
1 Ph.D of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran.
2 Associate Professor of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran
10.48308/jep.2026.240681.1235
Abstract
This study employs the Panel Smooth Transition Regression (PSTR) framework to analyze how financial inclusion indirectly shapes tax revenue across 50 countries (28 developing, 22 developed) during 2004–2024. A financial inclusion index, constructed via Principal Component Analysis (PCA) using ATM density, bank branch penetration, and outstanding deposits, serves as the transition variable. Results confirm non-linear relationships between financial inclusion, tariff structures, financial development, institutional quality, economic growth, and tax revenue. For developing nations, the threshold is 4.2240 with slope 2.1008. In Regime 1, bank branches show negative effects (-0.2166), while financial development is positive (0.2849). Beyond the threshold, bank branches remain negative (-0.0626), financial development positive (0.0573), and institutional quality turns favorable (0.0660). For developed economies, threshold is 6.7464 with slope 2.1993×10⁴. In Regime 1, bank branches are negative (-0.0502) while tariffs are positive (0.0516). In Regime 2, bank branches become positive (0.0077), financial development turns negative (-0.0853), institutional quality becomes strongly negative (-1.1205), and economic growth positive (0.4496). Granger causality tests reveal bidirectional relationships in developing countries, while developed nations show unidirectional causality from tax revenue to financial inclusion. Findings underscore that financial inclusion's influence on tax revenue is non-linear and context-specific. Policy recommendations include strengthening digital financial infrastructure in developing economies and implementing regulatory frameworks to prevent excessive inclusion in developed countries.
Keywords
Financial inclusion
Tax Revenue
PCA
PSTR Model
Abrar, M. A., & Hayat, M. A. (2026). An Analysis of the Macroeconomic, Structural, and Institutional Factors Affecting Tax Revenue in Pakistan: Evidence from an ARDL Model. Advance Journal of Econometrics and Finance, 4(2), 385-410. https://doi.org/10.5281/zenodo.20095674.
Ahamed. M. M., & Mallick. S. K. (2019). Is financial inclusion good for bank stability? International evidence. Journal of Economic Behavior & Organization, 157, 403–427. https://doi.org/10.1016/j.jebo.2017.07.027
Ajide, F.M., & Bankefa, O.I. (2017). Does Financial System Influence Tax Revenue? The Case of Nigeria. African Journal of Economic Review, 5(3), 15-33. https://doi.org/10.22004/ag.econ.302982
Akram, N. (2016). Do Financial Sector Activities Affect Tax Revenue in Pakistan?. The Lahore Journal of Economics. 21(2), 153-169.
Ali Al-Tameemi, A. O., Sojoodi, S., & Barghi Oskooee, M. M. (2027). Examining the Nonlinear Asymmetric Effects of Tax Revenues on Financial Development in Iran: Hatemi-J Asymmetric Causality and NARDL Analysis. Business, Marketing, and Finance Open, 4(2), 1-15.
Amidžic, G., Massara, M. A., & Mialou, A. (2014). Assessing countries’ financial inclusion standing-A new composite index. International Monetary Fund.‏
Anarfo, E. B., Abor JY, osei KA. (2020). Financial Regulation and Financial Inclusion in Sub-Saharan Africa: Does Financial Stability Play a Moderating Role?. Research in International Business and Finance, 51 (101070). 10.1016/j.ribaf.2019.101070.
Bakar, H.O. & Sulong, Z. (2018). The Role of Financial Inclusion on Economic Growth: Theoretical and Empirical Literature Review Analysis. Journal of Business & Financial Affairs. 7(4), 1-5.
Beck, T., Demirguc-Kunt, A., & Levine, R. (2007). Finance, inequality and the poor. Journal of Economic Growth, 12 (1), 27-49. DOI:10.1007/s10887-007-9010-6.
Blackburn, K., Bose, N. & Capasso, S. (2012). Tax evasion, the underground economy and financial development. Journal of Economic Behavior & Organization, 83 (2), 243-253. https://doi.org/10.1016/j.jebo.2012.05.019.
Camara, N. & Tuesta, D. (2014). Measuring Financial Inclusion: A Multidimensional Index BBVA Research Working Papers.
Capasso, S. & Jappelli, T. (2013). Financial development and the underground economy. Journal of Development Economics, 101, 167-178. https://doi.org/10.1016/j.jdeveco.2012.10.005.
Castro, G.A. & Camarillo, D.B.R. (2014). Determinants of tax revenue in OECD countries over the period 2001e2011. Contaduría Adm. 59 (3), 35-59.
Chebochok, M. C., & Bayale, N. (2023). Effects of financial inclusion on tax revenue mobilization: Evidence from WAEMU countries. African Development Review, 35(2), 226-238. https://doi.org/10.1111/1467-8268.12702
Chibba, M., (2009). Financial inclusion, poverty reduction and the millennium development goals. European Journal of Development Research. 21 (2), 213-230.
Clist, P. & Morrissey, O. (2011). Aid and tax revenue: signs of a positive effect since the 1980s. Journal of International Development, 23 (2), 165-180.
Colletaz, G & Hurlin, Ch. (2006). Threshold Effects Of The Public Capital Productivity : An International Panel Smooth Transition Approach. Leo Working Papers / Dr Leo 1669, Orleans Economics Laboratory / Laboratoire D'economie D'orleans (Leo), University Of Orleans.
Cull, R., Demirguc-Kunt, A. & Lyman, T. (2012). Financial Inclusion and Stability: what Does Research Show? No. 9443. The World Bank.
Ebi, B.O. (2018). Financial sector development and tax revenue in Nigeria. International Journal of Economics, Commerce and Management, 6 (6), 93-109.
El Bourainy, M., Salah, A., & El Sherif, M. (2021). Assessing the Impact of Financial Inclusion on Inflation Rate in Developing Countries. Open Journal of Social Sciences, 9, 397-424.
Elliott, D. J. (2010). Tax policy and bank regulation. Manuscript, Brookings Institution, Washington, DC.‏
Fouquau, J., Hurlin, C., & Rabaud, I. (2008). The Feldstein–Horioka puzzle: a panel smooth transition regression approach. Economic Modelling, 25(2), 284-299.‏ https://doi.org/10.1016/j.econmod.2007.06.008.
Goel, S., & Sharma, R. (2017). Developing a Financial Inclusion Index for India. Procedia Computer Science, 122: 949–956. https://doi.org/10.1016/j.procs.2017.11.459.
González, A., & Teräsvirta, T. (2006). Simulation‐based finite sample linearity test against smooth transition models. Oxford Bulletin of Economics and Statistics, 68, 797-812.‏ DOI: 10.1111/j.1468-0084.2006.00457.x
Gonzalez, A., Terasvirta, T., & Van Dijk, D. (2005). Panel Smooth Transition Regression Models. SEE/EFI Working paper Series in Economics and Finance, (604), 1-33.
Hannig, A., & Jansen, S. (2010). Financial inclusion and financial stability: Current policy issues (No. 259). ADBI working paper.‏
Hansen, B. E. (1999). Threshold effects in Non-Dynamic panels: Estimation, testing and inference. Journal of Econometrics, 93(2), 345-368. https://doi.org/10.1016/S0304-4076(99)00025-1.
Ilievski, B. (2015). Stock Markets and Tax Revenue. Journal of Applied Finance & Banking,.5(3), 1-16.
Jude, E. (2010). Financial development and growth: A panel smooth regression approach. Journal of Economic Development, 35(1), 15-33.
Karagöz, K. (2013). Determinants of tax revenue: does sectorial composition matter? Journal of Finance, Accounting & Management, 4 (2), 50-63.
Kebede, J. G., Selvanathan, S., & Naranpanawa, A. (2025). Financial stability and financial inclusion: a non-linear nexus. Journal of Economic Studies, 52(4), 742-761. https://doi.org/10.1108/JES-09-2023-0488.
Kim, J.H. (2016). A study on the effect of financial inclusion on the relationship between income inequality and economic growth. Emerging Markets Finance and Trade, 52 (2), 498-512. https://doi.org/10.1080/1540496X.2016.1110467.
Le, T. M., Moreno-Dodson, B., & Bayraktar, N. (2012). Tax capacity and tax effort: Extended cross-country analysis from 1994 to 2009. World Bank Policy Research Working Paper, (6252).‏
Lenka, S.K. & Sharma, R. (2017). Does financial inclusion spur economic growth in India?. The Journal of Developing Areas, 51 (3), 215-228. https://doi.org/10.1108/IJSE-10-2017-0444.
Maashani, S. S. S., Gamal, A. A. M., Shaarani, A. Z., Rambeli, N., & Zulkifli, N. (2025). The role of specific macroeconomic factors on tax revenue policy in an oil-dependent economy: evidence from Oman. Review of Economics and Political Science, 11 (1), 60-78. https://doi.org/10.1108/REPS-06-2024-0017.
Maherali, A. (2017). Financial inclusion, digital payments and their impact on income and tax revenue around the world (Doctoral dissertation, Harvard University).‏
Morgan, P. & Pontines, V. (2014). Financial Stability and Financial Inclusion. ADBI Working Paper 488. Asian Development Bank Institute, Tokyo.
Neaime, S. & Gaysset, I. (2018). Financial inclusion and stability in MENA: Evidence from poverty and inequality. Finance Research Letters, 24: 230–237. https://doi.org/10.1016/j.frl.2017.09.007.
Nguyen The, B., Oanh, T. T. K., Le, Q. D., & Nguyen, T. H. H. (2025). Nonlinear impact of financial inclusion on tax revenue: evidence from the Monte-Carlo simulation algorithm under the Bayesian approach. Journal of Economic Studies, 52(2), 393-411.‏ https://doi.org/10.1108/JES-01-2024-0010.
 Ogede, J. S. (2022). Does Financial Inclusion Impact Tax Revenue in Sub-Saharan African Countries? A Panel Data Analysis. African Journal of Management Research, 29(1), 80-95.‏
Ozili, P. K. (2026). Non-linear relationship in financial inclusion research: Thematic review, evidence, mechanisms, and methods. Modern Finance, 4(1), 36-53.
Oz-Yalaman, G. (2019). Financial inclusion and tax revenue. Central Bank Review. 19(3),107-113. https://doi.org/10.1016/j.cbrev.2019.08.004.
Park, C. & Mercado Jr., R.V. (2015). Financial Inclusion, Poverty, and Income Inequality in Developing Asia. Asian Development Bank, Manila.
Park, C. Y., & Mercado, R. V. (2021). Financial inclusion: New measurement and cross-country impact assessment 1. In Financial Inclusion in Asia and beyond (pp. 98-128). Routledge.‏
Raouf, E. (2022). The impact of financial inclusion on tax revenue in EMEA countries: A threshold regression approach. Borsa Istanbul Review, 22(6), 1158-1164. https://doi.org/10.1016/j.bir.2022.08.003
Sebai, M., & Talbi, O. (2024). A dynamic panel threshold regression on the financial inclusion-financial stability nexus: Evidence from developing countries. Economics Bulletin, 44(3), 813-831.
Senso, S., Chalu, H. Z., & Masanja, C. R. (2026). Unpacking the Nexus between Financial Inclusion and Tax Compliance in Tanzania. Business Management Review, 29(2) (SI), 100-115. https://doi.org/10.56279/bmri.v29i2.1253.
Shahbazi, K. & Saeedpour, L. (2013). Threshold Effects of Financial Development on Economic Growth in D8 Countries. Quarterly Journal of Economic Growth and Development Research. 3 (12), 38-21 (in Persian).
Sharma, D. (2016). Nexus between Financial Inclusion and Economic Growth: Evidence. from the Emerging Indian Economy. Journal of Financial Economic Policy, 8, 13-36. https://doi.org/10.1108/JFEP-01-2015-0004.
Wang, H., & Wei, W. (2020). Coordinating technological progress and environmental regulation in CO2 mitigation: The optimal levels for OECD countries & emerging economies. Energy Economics, 87, 104510.‏ 10.1016/j.eneco.2019.104510.
International Journal of New Political Economy

Articles in Press, Accepted Manuscript
Available Online from 27 July 2026

  • Receive Date 14 July 2025
  • Revise Date 26 July 2026
  • Accept Date 21 July 2026
  • First Publish Date 27 July 2026
  • Publish Date 27 July 2026