The Effects of Tax Policies on Financial Markets Development

In developing countries like Iran, fiscal policy instruments- especially taxes- affect the competitive power of financial markets and the performance of banking and non- banking institutions in these markets. Thus, the quality of combination of financial markets and tax policies for economic growth has raised many issues. On the one hand, theories state that any increase in taxes leads to a reduction in investment funds and has an opposite impact on financial markets. On the other hand, they state that taxes reduce market fluctuations and prevent financial crises. This paper studies the impact of taxes on financial market in Iran during 1970 – 2011 by using Bounds test and Auto-Regressive Distributed Lag (ARDL) model. Results show that taxation has a positive effect on financial markets. This indicates that the role of taxation, according to improvements in state’s tax system in recent years, has become more prominent in the further development of financial markets.