Money transfers and tax revenue in post-socialist countries: Evidence from the panel ARDL model

Abstract

This paper investigates the impacts of money transfers on tax revenue in the post-socialist countries. I evaluate the effects of these money transfers on direct, indirect, and total tax revenues in post-socialist countries. The Westerlund Cointegration test assesses the presence of a long-term relationship between money transfers and tax revenues, while the panel ARDL (Autoregressive Distributed Lag) model measures the effects of money transfers on tax revenues. The results show that money transfers increase tax revenue primarily via both direct and indirect taxes. Money transfers are not directly taxed, due to difficulties to tax and the possible discouraging effects on remitting. They can provide financial resources for entrepreneurs and facilitate the employment of idle production capacities, which results in increased economic activity and employment. As a consequence, money transfers could indirectly increase direct taxes via income taxes on bolstered economic activities and employment. In addition, money transfers are primarily used for improving and sustaining household welfare, which increases consumer spending. Therefore, increased consumption is taxed via indirect taxes.