ISSN 1450-2275 Issue 98 April-July, 2018
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The Determinants of Tax Revenue in Mongolia
Kuan-Ting Wang
Corresponding Author, Department of Finance, Asia University 500, Lioufeng Rd., Wufeng, Taichung 41354, Taiwan, R.O.C
E-mail: ktwang@asia.edu.tw Tel: +886-932-980248
Nyamgerel Jargalsaikhan
Department of Business Administration, Asia University 500, Lioufeng Rd., Wufeng, Taichung 41354, Taiwan, R.O.C
Abstract
The aim of the study is to investigate the determinants of tax revenue in Mongolia.
This study analyzed period of 2000-2017 in Mongolia.Data will be analyzed using SPSS software and multiple regression models will be used to estimate the relationships which exist between dependent and independent variables. The study employed only secondary data.Gross domestic product has strong influence on tax revenue. On the other hand, contrary to the expectation, inflation rate has no influence on tax revenue. The findings of this study might be useful for future students and people who are working in this field.
Hence, give the explanation of economic evidence that influencing on tax revenue.
Keywords: Tax revenue, Gross Domestic Product, Inflation, Foreign Direct Investment, Trade Openness
1. Introduction
Tax is the key sources of income for government. Tax is defined as a fee charged by a government on a product, income or activity. Taxes that charged directly on personal or corporate income are direct tax.
Hence, taxes charged on the process of goods or services are indirect tax. Mongolia is very tax approachable country compared than others. Government will use this tax revenue to fund all expenditure completed by government in order to reach an economic growth.
Mongolia is a vast, sparsely populated and landlocked between two big economies, Russia and China. It is bordered by Russia to the north and China to the south, east and west. Although Mongolia does not share a border with Kazakhstan, its western-most point is only 38 kilometers (24 mi) from Kazakhstan's eastern tip. Ulaanbaatar, the capital and largest city, is home to about 45% of the population. Mongolia's political system is a parliamentary republic (Wikipedia, 2015).
Mongolia is country located in north-central Asia. It is roughly oval shape, measuring 1,486 miles (2/392) from west to east and, at its maximum, 782 miles (1,259) from north to south.
Mongolia’s land area is roughly equivalent to that of the countries of western and central Europe, and it lies in a similar latitude range. The national capital, Ulaanbaatar is in the north-central part of the country.
Landlocked Mongolia is located between Russia to the north and China to the south, deep within the interior of eastern Asia far from any ocean. The country has a marked continental climate,
with long cold winters and short cool-to-hot summers. Its remarkable variety of scenery consists largely of upland steppes, semideserts, and deserts, although in the west and north forested high mountain ranges alternate with lake-dotted basins. Mongolia is largely a plateau, with an average elevation of about 5,180 feet (1,580 metres) above sea level. The highest peaks are in the Mongolian Altai Mountains (Mongol AltainNuruu) in the southwest, a branch of the Altai Mountains system.
Taxation is decisive economic tools to govern economics for any country, especially developing countries like Mongolia and income tax is one of the unquestionable ways to make sure the Government fund is available for outlay. Tax revenue is defined as the revenues collected from taxes on income and profits, social security, payroll taxes, taxes on the ownership and transfer of property, and other taxes.The purpose of this study is to analyze the factors that will increase or will reduce revenues from taxes collected by the government. Tax is the duty charged by the government of country upon habitats for its support or for the purpose of easing the service delivery in a country (Aamir, Quyyam, Nasir, Hussain, Khan & Butt 2011). This paper will endeavor to indicate which determinants have significant influence on tax revenue.
The 86.2 percent of Government Revenue of Mongolia collected from Tax Revenue in July 2018. Furthermore, Tax Revenue of Mongolia has been increasing for the last decades. Nonetheless, Mongolia is facing budget deficiency, as well as the living standard of population has been rapidly falling down to low living standard. The Determinants of Tax Revenue required to be conducted since Tax Revenue is the main source of Government Revenue. I have completed my bachelor degree as a Tax Economist in Mongolia, when I was in university I needed to examine determinants of tax revenue. Yet almost none of the researches were conducted in Mongolia. Thus, as a research student, I aim to do the research about determinants which has significant influence on Tax Revenue.
Tax revenue has been lowest throughout the study period (1995-2017). Mongolia is facing budget deficit every year since government expenditure exceeded government revenue. If the government’s budget is not sufficient, some of the macroeconomic factors cannot be reached. So cannot decrease unemployment, inflation rate and also can’t raise economic growth.
This study will discover factors determinant of tax revenue which is mediating variable Gross Domestic Product (GDP), independent variables such as inflation rate, and foreign direct investment, and openness.
The main objective of this study is to determine factors which are influencing Tax revenue in Mongolia. Besides, there are other specific objectives in this study such as: (1) to determine which factor has positive influence on tax revenue; (2) to determine which factor has negative influence on tax revenue.This study will consider these questions to find factors determining tax revenue.
The questions are:
1. What is relationship between GDP and Tax Revenue?
2. What is relationship between Inflation rate and Tax Revenue?
3. What is relationship between Foreign Direct investment and Tax Revenue?
4. What is relationship between Openness and Tax Revenue?
The key terms used throughout this study are defined as follows: Tax revenue ( hereinafter referred to as TARV) Collected in a country given its economic, social, institutional, and demographic characteristics, potential tax collection represents the maximum revenue that could be obtained through the law tax system (Entela and Llambhi, 2010).Gross Domestic Product (hereinafter referred to as GDP) shows the market value of all final goods and services produced in the economy of a country for a given period of time (Mayo and Noviembre, 2010). Foreign Direct Investment (hereinafter referred to as FDI) Flows record the value of cross-border transactions related to direct investment during a given period of time, usually a quarter or a year (OECD, 2014).Inflation Rate (hereinafter referred to as INFL) sustained increase index in the level of prices in an economy over a given period time ( Mohan, 2015).Openness (hereinafter referred to as OPEN) ratio of exports plus imports to GDP (Hand Book of Statics).
2. Literature Review
This chapter briefly reviews background information about Mongolia and explain the relationships between chosen variables.
Historically, the first taxation system in Mongolia was authorized in the 13th century “Mongols Empire”. Central government revenue of Mongolia from 1911 to 1924 period of the autonomy, 75 percent was from tariffs. There is an office memorandum that no direct monetary taxes were levied on the population by the central government at this time. Rest of the government revenue was directly income from state properties and enterprises.From 1925 to 1927, the tax system was reformed as part of the over-all currency reform which took place at the same time.Prior to 1924, the Mongolian tax system is reformed due to fact that changes of currency.
The modern tax system in Mongolia was established in the early 1990s, after the transition to democracy and market economy. The General Law of Taxation was introduced in 1993 and provided a basis for the Mongolian Tax Administration (MTA) to implement tax laws and collect taxes. MTA collects 27 taxes including value added tax, personal and corporate income, payroll, excise taxes and other small taxes such as duty and fees. Tax collection for all levels of authorities across the country is centralizes into General Department of National Taxation (GDNT). MTA collects third-party information on taxpayers from other government agencies, and receives complaints and information about the conduct of tax inspectors from individual economic entities.
Tax Revenue
Tax revenue is the government income which is collected from different items, sectors like corporation tax, income tax, wealth tax, customs, union excise, service, taxes on Union Territories like land revenue, stamp registration etc. Taxes collected from both direct and indirect tax are considered Tax Revenue.
Governments often use different techniques of increasing resources like, borrowing, receipt of aid, printing of money and taxation. Nonetheless, taxation is certainly the most important source of government revenue (Chaudhry and Munir, 2010). Most governments in developing countries are targeting at motivating and guiding their economic and social development. For this purpose, the implementation of an effective tax policy is an important tool by which resources are better mobilized (Wawire, 2011).
Whereas the amount of tax revenue measure the capacity of the economy to finance government expenditure, in most developing countries the level of taxation is still remain poor (Haque, 2009).
According to Wilford and Wilford (1978) to enhance economic growth, developing countries ought to increasingly mobilize their own internal resources which can be achieved through tax revenue generation. Economic inequality remains the problem of most developing countries for the past several decades. The reason is ascribed to rapid growth of government expenditure and low revenue collection (Ansari, 1982).
Gross Domestic Product
Gross Domestic Product shows the all market value of all goods and services produced in the economy of country for a given period time. It is also defines as an economic dimension that display the total income and output of country.
Gross Domestic Product is the key summary statistic of economy activity (Bureau of Economic Analysis, 2007) and the most important variable in analyses of economic growth (Henderson , 2012).
The result of a study (Gupta, 2007) on Determinants of Tax Revenue Efforts in Developing Countries confirmed that structural factors such as per capita GDP and agricultural share GDP significantly affect revenue performance of an economy. In contrast, (Tadele, 2013) examined the determinants of tax buoyancy (the ratio of percentage change of tax revenue to percentage change of
GDP), he did not tried to search for factors that would influence tax revenue generation in Ethiopia.
The study also did not integrate policy variables like, inflation and agriculture value-added share of GDP and industrial share of GDP.
Foreign Direct Investment
Foreign Direct Investment (FDI) occurs when an investor in one country acquires or expands its ownership of a business entity in another country and the equity participation is sufficiently large to give the investor management control. It is the management dimension that distinguishes FDI from portfolio investment in foreign stocks and other financial instruments. Both foreign direct and portfolio investments are favorable for a given country.
The most of the economic problems that developing countries are encountering is they do not have sufficient state savings to contribute their investment. They are in terms of stable foreign capital both direct and indirect investments. FDI is the easiest way to get foreign capital without any risk.
Agiomirgianakiset al. (2003) mentioned that FDI is mostly defined as capital flows resulting from the behavior of multinational companies (MNCs).
There is several literature reviews mentioned that FDI increase income taxes by improving the productivity of domestic firms, generate taxes on income wages through employment creation, generate additional international trade taxes revenue through increased export, increase value-added tax and boost directly tax revenue.
Gupta (2007) mentioned that foreign direct investment has been identified as a factor that may affect revenue performance.
Openness
The meaning of openness has become similar to the notion of Free Trade, which is a trade structure where all trade misrepresentations are disregarded. Openness also means the extent to which an economy is open to trade, as well as occasionally similarly to inflows and outflows of international investment. In my study the Openness means Trade Openness that consists of import and exports from a large percentage of GDP.
Inflation Rate
Inflation Rate measures the increase in price index. We also use it to analyze real interest rate. It is the percentage rate of change in price level of given time.
Workineh (2016) said that “Inflation is a sustained rise in the general price level of goods and services in an economy”. It is the deputation for macroeconomic stability of a country. Crane and Nourzad (1986) indicated inflation as non-legislated tax increase which enhances government revenue.
Taxpayers will absorb in an casual or underground economic activity. Thus, inflation is expected to affect tax revenue negatively (Workineh, 2016).
Table 10: Summary Table of Variables
Variable
(Abbreviation) Definition Source of Definition
Other Sources Using
the Same Variable Location/
Tax Revenue (TARV)
Collected in a country given its economic, social, institutional, and
demographic
characteristics, potential tax collection represents the maximum revenue that could be obtained through the law tax system.
Entela, Llambhi (2010)
Diana Berenice (2014) InstitutoPolitécnico Nacional
Chaudhry, Munire (2009)
Bahauddin Zakariya University Multan, Pakistan Gupta (2007) International Monetary
Fund
Joweria (2010) University of Bath Department of Economics
Gross Domestic Product (GDP)
GDP shows the market value of all final goods and services produced in the economy of a country for a given period of time.
Mayo, Noviembre (2010)
Workineh (2014) Department of Economics, Wachemo University Diana Berenice (2014) Instituto Politécnico
Nacional Chaudhry, Munire
(2009)
Bahauddin Zakariya University Multan, Pakistan Gupta (2007) International Monetary
Fund Foreign Direct
Investment (FDI)
Flows record the value of cross-border transactions related to direct
investment during a given period of time, usually a quarter or a year.
OECD (2014)
Chaudhry, Munire (2009)
BahauddinZakariya
University Multan, Pakistan Gupta (2003) International Monetary
Fund
Gupta (2007) International Monetary Fund
Openness (OPEN)
Ratio of exports plus imports to GDP.
Hand Book Of Statics
Gaalyaa (2017) Markerere University Uganda
Inflation (INF) Sustained increase in the level of prices in an economy over a given period time.
Mohan (2015)
Velaj (2014) University Albania
Gross Domestic Products (GDP) has positive and significant influence on Tax Revenue
Researchers have included several variables such as per capita GDP, to ratio of foreign aid to GDP and degree of trade as potential determinants of revenue performance.
Most studies find that per capita GDP is positively related to tax revenue. Lotz and Morss (1967) find that per capita income is determinants of the tax share ( Lotz and Morss as cited in ICOEA 2010). A higher level of development goes together with a higher capacity to pay and collect taxes, as well as a higher relative demand for income elastic public goods and services ( Chelliah as cited in ICOEA 2010).
Higher level of per capita income is expected to have a positive influence on tax revenue.
WorkinehAyenew’s research shows that short run Real GDP per capita income and inflation have negative effect. Industrial value-added share of GDP, by contrast, has positive effect on tax revenue in Ethiopia. Real GDP per capita was opposite to the prior expectation.
Inflation Rate has Negative and Significant Influence on Tax Revenue
Rwechungura (2016) used inflation as independent variable and conducted that inflation was found to be statically insignificant in influencing tax revenue.
The study of Ngotho and Kerongo (2014) examined the effect of inflation on revenue collection. They observed that the extent to which inflation influenced revenue collection in Kenya. Their observation indicates that the extent to which inflation level affects revenue collection was correspondingly avowed by 36.6% and 46.3% of the respondents who took part in the study. A small percentage of the respondents (4.8%) did specify that inflation effected only to a little amount. When inflation falls, revenue collection increases (Ngotho, J., &Kerongo, F., 2014).
Foreign Direct Investment has Positive and Significant Influence on Tax Revenue
Gupta, A (2007) found that foreign direct investment improves revenue performance. Mawussa (2013) conducted that FDI has positive effect on tax revenue through several channels which are VAT revenue, income and labor tax revenue, indirect taxes, and international trade tax revenues. On the other hand, FDI has negative effect on tax revenue through the existence of inducements like free enterprise zones, where imports and exports usually free from tariff and taxes and corporate taxes are low or equal to zero.
Openness has Positive and Significant Influence on Tax Revenue
The theoretical linkage between trade openness and direct taxes is likely to be through price change or economic growth. This relationship has been examined by a number of studies such as Frankel, J.A.,
&Romer, D (1999), Ebrill, L., &Gropp, R. E., &Stotsky, J (1999) and Tanzi, V (1987) among others.
Amongst these studies Ebrill, L., &Gropp, R. E., &Stotsky, J (1999) points out that trade openness is related to high levels of economic growth and that countries that have opened up to trade have increased their levels of growth and income taxes.
Gaalya, M.S., Edward, B., & Eria, H (2017) in this study establishes the effects of trade openness on direct, indirect, trade as well as total tax revenue. Trade ratio to GDP has positively influence taxes in EAC countries (Gaalya, M.S., Edward, B., & Eria, H, 2017)
GDP Mediates the Relationship between Inflation and Tax Revenue
There is a positive correlation of percentage growth of revenues from taxes with the rate of inflation and the GDP growth rate (Velaj, E., & Prendi, L, 2014). In Chernov, M (2012) study GDP increase does not affect prices of risk.
Chaudhri (2012) demonstrated the relationship between inflation and GDP growth in Pakistan and observed that there is a long run stable relationship.
Mohan, A., & Balasubramanian, P (2016) found that there is a long run relationship between exchange rate and inflation besides between GDP and inflation.
GDP Mediates the Relationship between Foreign Direct Investment and Tax Revenue
Investment is the forceful component of Gross Domestic Product (GDP), the only one that agrees domestic production to growths and with employment. The example recognized that stated that a growth in FDI would effect in a growth in GDP, was not screening effects but on the other hand, when the GDP increases more striking a country grow into foreign investment funds. Villegas-Zermeño (2012) conducted the absence of a causal relationship between FDI and GDP growth.
GDP mediates the relationship between Openness and Tax Revenue
Several studies conducted that countries exporting higher quality products grow more rapidly. Vitally, they have found a stimulating non-linear form between the trade dependency ratio and trade in quality, signifying that trade might influence growth negatively for countries which have particular in low- quality products.
Table 11: Summary table of hypothesis
Variable (Abbreviation) References Sample/Location/ Results Statistical
(H1) GDP⇒⇒⇒⇒TARV
Workineh (2014) Department of Economics,
Wachemo University Accepted β= -.599**
Diana Berenice (2014) InstitutoPolitécnico Nacional Accepted β= -.597**
Chaudhry, Munire (2009) BahauddinZakariya University
Multan, Pakistan Accepted β= -.688**
Gupta (2007) International Monetary Fund Accepted β= -.440**
(H2) INFL⇒⇒⇒⇒ TARV Velaj (2014) University Albania Accepted β= 0.564***
(H3) FDI⇒⇒⇒⇒ TARV
Chaudhry, Munire (2009) BahauddinZakariya University
Multan, Pakistan Accepted β= 0.74***
Gupta (2003) International Monetary Fund Accepted β= 0.833**
Gupta (2007) International Monetary Fund Accepted β= 0.833**
(H4) OPEN⇒⇒⇒⇒ TARV Gaalyaa (2017) Markerere University Uganda Accepted β= -0.64**
3. Methodology
This chapter explains the research methodology and research design used in this study. Further, research design, research framework, and research framework are examined. The research instrument and data collection are identified, and the chapter concludes by describing the data analysis.
Research Methodology
In this study econometric technique which is Regression analysis used to test the relationships between dependent variable and independent variables. Regression was run with the total of five variables which are dependent variable total Tax Revenue, mediating variable Gross Domestic Product, and three independent variables which are Inflation, Foreign Direct Investment, and Trade Openness. The data will be analyzed through the analyses of Beta coefficient. We have used this measure in order to understand the connection between dependent and independent variables. The Coefficient of determination R-square is used to explain the dependent variables in the regression analyses. T-statistic is used to identify the significance of each dependent variable with the independent variable and after we use F-test to test the significance of all independent variables. Standard Error of Estimation (SEE) is used to test the level of confidence and simple regression analysis.
ࢀࢇ࢞ ࡾࢋ࢜ࢋ࢛ࢋ = ࢼାࢼࡳࡰࡼ࢚+ ࢼࡵࡺࡲࡸ࢚+ ࢼࡲࡰࡵ࢚+ ࢼࡻࡼࡱࡺ࢚ + ࡱ࢚ (1) Where GDP is the Gross Domestic Product. INFL is inflation expressed as a Consumer Price Index. FDI is Foreign Direct Investment expressed as FDI inflows. OPEN is Openness expressed as the percentage of imports plus exports. E is the error term.
Research Design
Figure 1: Research Framework
Independent Variables
Independent variable is what researcher control and manipulates in order to observe the dependent variable. This study has three independent variables: INFL, FDI, OPEN.
Mediating Variable
Mediating variable or intervening variable is explaining a relation or a causal link between independent and dependent variable. This study has one mediating variables: GDP.
Dependent Variable
Dependent variable is what researcher measure and what is affected in the research. The dependent variable used in this study is Tax Revenue.
Hypothesis
H1: Gross Domestic Products (GDP) has significant influence on Tax Revenue (TARV) H2: Inflation Rate (INFL) has significant influence on Tax Revenue (TARV)
H3: Foreign Direct Investment (FDI) has significant influence on Tax Revenue (TARV) H4: Trade Openness (OPEN) has significant influence on Tax Revenue (TARV)
H5: Gross Domestic Products (GDP) mediates the relationship between Inflation Rate (INFL) and Tax Revenue (TARV)
H6: Gross Domestic Products (GDP) mediates the relationship between Foreign Direct Investment (FDI) and Tax Revenue (TARV)
H7: Gross Domestic Products (GDP) mediates the relationship between Trade Openness (OPEN) and Tax Revenue (TARV).
Data Collection
This study uses only secondary data. Data in regard to all variables were collected from National Statistics Office of Mongolia and World Bank’s website. The sources of this data might be almost 100% consistent as long as they were attained from applicable and reputable authorities. The all variables of this study are adopted from the previous research papers and journals carried their studies on the same and similar topic or the topic that includes one of the variables of this study.
Data Analysis Procedure
The data analysis in this study followed several statistic procedures; SPSS (Statistical Package for the Social Science) 21 and SPSS will used to analyze the data. Four types of statistic will be used in this study; descriptive statistic, correlation analysis, simple linear regression analysis and multiple regression analysis.
4. Empirical Results
This chapter shows the result of the research by presenting the result of data analysis procedures;
regression analysis. With the given data I have run the descriptive analysis, regression using SPSS for Mongolia where Y represents the dependent variable which is Tax revenue of the country and X represents the independent and mediating variables such as INFL, OPEN, FDI, and GDP. We have run the frequency test for the data to check mode and most frequently occurred numbers are TARV=10.699, GDP= 12.160, OPEN= 11.219, FDI= 8.751 and INFL= .253%. This study used the data covered from 2000 to 2016. The reason for the exclusion of data before 2000 was that, Mongolia is developing country and Mongolian economy transited to a democracy from centrally-controlled political system in 9th of March in 1990 so that existing data before 2000 is not reliable for the research.
Descriptive Statistics
Table 3: Descriptive Analysis. Shows the basic features of data which are minimum, maximum, mean and standard deviation of research data
DESCRIPTIVE STATISTICS
N Minimum Maximum Mean Std. Deviation
LN(TARV) 72 10.669 15.656 13.565 1.277
LN(GDP) 72 12.16 15.801 14.281 1.093
LN(OPEN) 72 11.219 14.707 13.164 1.033
LN(FDI) 72 .000 14.536 11.150 3.147
INFL 72 3.666 3.983 .678 1.201
Valid N (listwise) 72 Correlation Analysis
Correlation analysis is used to quantify the association between two continuous variables and direction of the two variables. As regards the strength of relationship, the value of the correlation coefficient ranges between +1 and -1. A value of ± 1 indicates a perfect degree of relationship between the two variables. In the table 4 I conducted Pearson r Correlation, which is mostly used to measure the linear relationship between two variables.
Table 4: Correlation Analysis
CORRELATIONS LN
(TARV)
LN (GDP)
LN (OPEN)
LN
(FDI) INFL
LN (TARV)
Correlation Coefficient 1.000 .930** .918** .615** -.262*
Sig. (2-tailed) . .000 .000 .000 .026
N 72 72 72 72 72
LN (GDP)
Correlation Coefficient .930** 1.000 .968** .614** -.186
Sig. (2-tailed) .000 . .000 .000 .117
N 72 72 72 72 72
LN (OPEN)
Correlation Coefficient .918** .968** 1.000 .673** -.140
Sig. (2-tailed) .000 .000 . .000 .241
N 72 72 72 72 72
LN (FDI)
Correlation Coefficient .615** .614** .673** 1.000 .016
Sig. (2-tailed) .000 .000 .000 . .891
N 72 72 72 72 72
INFL
Correlation Coefficient -.262* -.186 -.140 .016 1.000
Sig. (2-tailed) .026 .117 .241 .891 .
N 72 72 72 72 72
*. Correlation is significant at the 0.05 level (2-tailed).
As showed in the table 4 the Correlation coefficient of dependent variable and independent variables are ranges between 0.614 and .0968, which means our dependent variable has strong statistical relationship with independent variables such as log of GDP, log of FDI and log of OPEN, in contrary one of independent variable which is INFL (inflation rate) has negative strong relationship with log of TARV.
Regression Analysis
In this study I used regression analysis to estimate the relationships among dependent and independent variables which are TARV as a dependable variable, INFL, OPEN and FDI as an independent variables (predictors).
Table 5: Regression Analysis
MODEL SUMMARY
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .941a .886 .879 .444
a. Predictors: (Constant), INFL, LN(GDP), LN(FDI), LN(OPEN) ANOVAa
Model Sum of Squares df Mean Square F Sig.
1
Regression 102.690 4 25.673 129.747 .000b
Residual 13.257 67 .198
Total 115.947 71
a. Dependent Variable: LN(TARV)
b. Predictors: (Constant), INFL, LN(GDP), LN(FDI), LN(OPEN)
COEFFICIENTS Model Unstandardized Coefficients
t Sig.
B Std. Error
(Constant) -1.898 .697 -2.723 .008*
LN(OPEN) 1.148 .055 20.820 .000***
LN(GDP) 1.087 .051 21.721 .000***
LN(FDI) .079 .048 1.622 .005***
INFL -.127 .126 -1.005 .318
a. Dependent Variable: LN(TARV)
b. Independent Variables: LN(GDP), LN(OPEN), LN(FDI), INFL c. note: ***p<0.01, **p<0.05, and *P<0.1
From the result of linear regression analysis coefficient on log of tax revenue is significantly positive in all the variables. This result is falling into line with other previous studies such as Gupta (2007).
Contrary, we found that the only one variable of our study which is INFL has no influence on TARV. The result not supported literature and theory that suggested negative relationship between tax revenue and inflation rate.
Next, in most specifications we find a strong positive significant relationship between log of TARV and log of GDP because it has a p value of 0.000. The independent variable log of OPEN is also statistically positively significant because p value is same as log of GDP which is 0.000. For example increase in ratio of import may increase TARV. One of the reasons of this result is explained by Gupta (2007) said that trade-related taxes are easier to impose because the goods enter or leave the country atspecified locations.
We also find that foreign direct investment has positive and significant effect on TARV, but relationship is slightly weaker than all of the other independent variables. On the study of Mawusse (2013), the result was in line with our, he conducted 10% increase in FDI leads to increase in total tax revenue by 4.78%. According to the studies, FDI can improve tax revenue directly and indirectly.
Therefore, this results confirm some of the literatures for example Danielova and Sarkar (2012), Fuest and Riedel (2009).
Based on the regression analysis, we presented the result of the some proposed hypothesizes on table 6 and figure 2. As we can see in that table, 4 out of 7 hypotheses of this study accepted due to significant levels.
Table 6: Summary of Hypotheses
Hypotheses Path P-Value Statement of Hypothesis Result
H1 GDP ---> TARV .000*** GDP has significant influence on TARV Supported H2 INFL ---> TARV .318 INFL has significant influence on TARV Rejected H3 FDI ---> TARV .000*** FDI has significant influence on TARV Supported H4 OPEN ---> TARV .000*** OPEN has significant influence on TARV Supported
***p<0.01, **p<0.05, and *P<0.1
Figure 2: Result of Regression
Test for Mediation
In order to answer the research questions of this paper, we examine mediating effect of each mediator.
Several methods are available to test statistical significance of mediated models. In this study we used bivariate regression to investigate if mediator is mediating or not and multiple regression analysis to whether mediator is a partial or full mediator using SPSS.
Figure 3: Result of Mediator
Table 7: Summary of the mediation
Indirect (ab) Direct (c') Total (c ) Mediation H5 INFL-> GDP-> TARV .000*** .006 .318 Not Supported
H6 FDI-> GDP-> TARV -.838 .843 .005** Supported/Partial Mediation H7 OPEN-> GDP-> TARV -.080* .000 .080* Supported/Partial Mediation
As we can see from the Figure 3 and Table 7, the mediating test of GDP indicates partial mediation in this study. The H5 is not supported because relationship between FDI and GDP is .991
which not significant also total effect between INFL and TARV is .318, then after the mediation no change occurs. Meanwhile, the total effect between FDI and TARV is .005**, then after the mediation direct effect become .843 given these point it can be said H6 is supported and GDP partially mediates between FDI and TARV. Finally, the total effect between OPEN and TARV is .080*, then after the mediation direct effect become .000*** due to this result H7 is supported and indicated partial mediation.
Summary of All Hypotheses Results
This chapter described all the statistical analysis that used in this study by using SPSS 21. The results presented from descriptive statistics, correlation, simple linear regression analysis and multiple regression. And below table 8 presents result summary of all hypotheses.
Table 8: Table of All Hypotheses Result
Items Hypotheses Result
H1 GDP has significant influence on TARV Supported
H2 INFL has significant influence on TARV Rejected
H3 FDI has significant influence on TARV Supported
H4 OPEN has significant influence on TARV Supported
H5 GDP mediates relationship between INFL and TARV Rejected H6 GDP mediates relationship between FDI and TARV Supported H7 GDP mediates relationship between OPEN and TARV Supported
5. Discussion and Conclusion
Previous chapters are explaining about the variables and proposed hypotheses and talking about the result of this study. This chapter also contains of summary and discussion of the findings, implication, limitation and recommendation for the future studies.
Summary and Discussion Findings
The main objective of this study was to investigate the determinants of tax revenues in Mongolia for the period of 17 years (2000-2017). As discussed in chapter 2 all the variables were adopted from previous studies yet none of them conducted in Mongolia. The data are quarterly data of Mongolia covering period of 2000-2017. This study analysed 7 hypotheses with 2 mediating hypotheses. Three independent variables (INFL, FDI, OPEN), one mediating variable (GDP) and one independent variable (TARV) were analysed.
According to the regression analyses, it is evident that three of variables which are gross domestic products, foreign direct investment and trade openness are positive statically significant influencing tax revenue of Mongolia. In opposite only one variable which is inflation rate has no influence on tax revenue.
The first main factor that positively influencing on tax revenue is gross domestic product. The result is interpreted as a 1% increase in GDP income results in a raise in tax revenue percentage of GDP by 0.93 per cent, tax revenue percentage to GDP does not increase as much as the raise in real GDP.
Result also indicates that trade openness, total of import and export, can influence on tax revenue. It implies that when trade openness increases tax revenue. As long as country imposes tax on every import and export directly and indirectly.
From the regression analysis also we noticed that foreign direct investment has statically significant positive influence on tax revenue because they have a p-value of .000. On the regression result, it appears that a 1% increase in FDI leads to an increase in tax revenue by 0.1%. Moreover, FDI
can boost revenue indirectly by providing taxable income through job creation, facilitating access to foreign markets and improving the efficiency of domestic firms ( UNCTAD, 2012).
Contrary to the expectation, inflation rate has no effect on tax revenue in Mongolia because p- value between tax revenue and inflation rate is .318 which is not significant. From most of the previous studies inflation rate influencing on tax revenue negatively. When inflation rate increases the purchasing power of consumers’ decrease it might cause cutback on value added tax. On the other hand, inflation rate of Mongolia has been stable for last 2 decades so that inflation rate has no effect on tax revenue.
Limitation and Suggestion for Future Studies
First, this study limits the period of only 17 years. Therefore, data used in this research is not included 2018 so that there might be some changes in Mongolian economy first two quarter of this year. Future research should gather more recent and old data’s from reliable resource. Hence, existing previous studies were limited and most of the used literature reviews of this study were cases of developing countries even though some of them conducted in developed country. The literature review can be expanded. Moreover, conceptual framework also has limitations with one dependent, three independent and one mediating variables. We suggest for future studies that consider other variables such as unemployment, foreign aid literacy rate to develop the finding of the study.
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