Iranian Journal of Economic Research

Dynamics of the Relationship Between Financial Inclusion and Tax Revenue: A Wavelet-Based Multiscale Quantile-on-Quantile Analysis

Document Type : Research Paper

Authors

Ali Moridian 1
Fatemeh Havas Beigi 2

1 Ph.D. in Economics, Urmia University, Urmia, Iran

2 PhD student in Economics, Urmia University

https://doi.org/10.22054/ijer.2026.89259.1443
Abstract
This study examined the impact of financial inclusion on tax revenue in Iran over the period 1980–2022 using the novel wavelet quantile-on-quantile regression (WQQR) approach. This advanced methodology allows the relationship between variables to be analyzed across different quantiles and multiple time horizons, including the short, medium, and long run. Tax revenue was treated as the dependent variable, while financial inclusion, inflation, trade openness, real GDP per capita, and urbanization were considered as explanatory variables. Preliminary analyses, including the Brock–Dechert–Scheinkman (BDS) test and quantile–quantile (Q–Q) plots, revealed significant nonlinear dynamics and asymmetric distributions in the time series, thereby supporting the use of wavelet-based quantile methods. The empirical results showed that the effect of financial inclusion on tax revenue is heterogeneous across time horizons. In the short run, its impact is modest and varies with the level of financial inclusion. In the medium run, expanded access to financial services and enhanced informational transparency generate a significant positive effect. In the long run, financial inclusion exerts a consistently positive and sustainable influence on tax revenue. The effects of the control variables also vary across time horizons and distributional conditions. Inflation has a negative impact on tax revenue in the short run, although this effect gradually diminishes over longer horizons. Trade openness generally contributes positively to tax revenue, while economic growth strengthens tax revenue across all time scales. Urbanization also plays a positive role by broadening the tax base over the long run. Overall, the findings suggest that promoting financial inclusion, alongside institutional reforms and the digitalization of the tax system, can serve as an effective policy instrument for enhancing the sustainability of tax revenues in Iran.
Introduction
Financial inclusion has emerged as a key policy instrument for strengthening fiscal capacity and promoting sustainable economic development. By facilitating access to formal financial services, it increases the transparency of economic transactions, reduces the size of the informal economy, improves tax compliance, and broadens the tax base. Consequently, governments can mobilize more stable domestic revenues and reduce dependence on volatile sources of public finance.
Although a substantial body of international evidence documents a positive association between financial inclusion and tax revenue, empirical findings also indicate that this relationship is nonlinear and varies across different levels of financial development and macroeconomic conditions. In Iran, where public finances have historically depended on oil revenues and have been constrained by economic sanctions, persistent inflation, tax evasion, and a large informal sector, strengthening tax revenue has become a critical policy objective.
Despite significant expansion in banking infrastructure and digital financial services in recent years, there is limited empirical evidence on whether improvements in financial inclusion have translated into higher tax revenues. To address this gap, the present study aimed to examine the impact of financial inclusion on tax revenue in Iran over the period 1980–2022, while controlling for inflation, trade openness, GDP per capita, and urbanization. Unlike previous studies that mainly rely on conventional linear econometric models, the current analysis sought to apply advanced second-generation nonlinear techniques capable of capturing heterogeneous relationships across different quantiles and time horizons, thereby providing a more comprehensive understanding of the relationship between financial inclusion and tax revenue.
Materials and Methods
The present study used annual data for Iran spanning the period 1980–2022. Tax revenue served as the dependent variable, while financial inclusion was considered as the primary explanatory variable. Inflation, trade openness, GDP per capita, and urbanization were incorporated as control variables. Tax revenue data was obtained from the Central Bank of Iran, and macroeconomic indicators were sourced from the World Bank. Moreover, the financial inclusion index was taken from the International Monetary Fund, in which financial inclusion is measured by access to financial institutions, proxied by indicators such as the number of bank branches and automated teller machines (ATMs) per 100,000 adults.
All variables were transformed into natural logarithms and converted from annual to quarterly frequency using quadratic interpolation to facilitate wavelet decomposition. Preliminary analyses included descriptive statistics, quantile–quantile (Q–Q) plots, the Brock–Dechert–Scheinkman (BDS) test for nonlinear dependence, and the wavelet quantile augmented Dickey–Fuller (WQADF) unit root test. The main empirical analysis was conducted using the wavelet quantile-on-quantile regression (WQQR) approach, which helped examine heterogeneous relationships across short-, medium-, and long-term horizons. In addition, the quantile-on-quantile Granger causality (QQGC) approach was used to investigate nonlinear causal interactions among the variables.
Results and Discussion
The preliminary analyses revealed significant non-normality and nonlinear dependence across all variables, indicating that conventional linear estimation techniques are insufficient to capture the complex dynamics of Iran’s economy. The WQADF test further showed that the stationarity properties of the variables varied across quantiles and time scales, thereby supporting the use of wavelet-based nonlinear methods. The WQQR results indicated that financial inclusion exerted heterogeneous effects on tax revenue across different economic conditions and time horizons.
In the short run, the positive impact is strongest at the upper quantiles of both financial inclusion and tax revenue, suggesting that improvements in financial accessibility enhance fiscal performance primarily under relatively favorable economic conditions. In contrast, the effects were found weak or even negative at the lower quantiles, where limited financial access and the prevalence of informal economic activities constrain tax collection. In the medium term, the positive relationship becomes more stable as broader participation in the formal financial system enhances transaction transparency and improves tax administration. Over the long run, financial inclusion significantly strengthens tax revenue by expanding the formal economy, increasing the adoption of digital financial services, improving taxpayer identification, and reducing tax evasion.
The results further showed that inflation exerted a negative effect on tax revenue in the short run, as rising prices would erode the real value of taxable income; however, this adverse impact gradually diminishes as fiscal policies and tax systems adjust over time. Trade openness contributes positively to tax revenue by stimulating economic activity and broadening the tax base, although these gains are partially offset by external sanctions and exchange-rate volatility. Likewise, higher GDP per capita consistently enhances tax revenue through increased production, employment, and corporate profitability, while urbanization promotes revenue mobilization by concentrating economic activity and expanding taxable consumption. Overall, as the findings demonstrated, the determinants of tax revenue operate through nonlinear and asymmetric mechanisms that vary considerably across quantiles and time horizons, underscoring the advantages of wavelet-based quantile techniques over conventional econometric approaches in capturing these complex relationships.
Conclusion
Financial inclusion is a key determinant of tax revenue in Iran; however, its effectiveness varies across economic conditions and time horizons. The positive impact of financial inclusion becomes substantially stronger over the medium and long term as financial transactions become more transparent and the formal financial system expands. Nevertheless, structural challenges—including persistent inflation, dependence on oil revenues, external sanctions, weaknesses in tax administration, and the prevalence of informal economic activities—continue to constrain fiscal performance. Consequently, expanding financial access alone is insufficient to achieve sustainable growth in tax revenue.
Policymakers should therefore complement financial inclusion policies with comprehensive tax reforms, including the digitalization of tax administration, the adoption of electronic invoicing, the integration of financial information systems, stronger coordination between financial institutions and tax authorities, and policies that encourage the formalization of economic activities. These reforms would help broaden the non-oil tax base, reduce tax evasion, enhance fiscal sustainability, and support long-term economic development. Furthermore, the study highlighted the value of advanced nonlinear econometric techniques, particularly the WQQR framework, in capturing heterogeneous relationships that remain undetected by conventional linear models, thereby providing more robust evidence to inform fiscal policy formulation.

Keywords

Financial Inclusion
Wavelet Quantile-on-Quantile Regression
Tax Revenue
Wavelet Analysis
Subjects
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  • Receive Date 26 December 2025
  • Revise Date 29 June 2026
  • Accept Date 14 May 2026
  • First Publish Date 14 May 2026

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