Digital Economy and Tax Revenue Nexus: Do Financial Development and Institutional Quality Matter? Evidence from Emerging Economies

Abstract

This study investigates the impact of digital economy development on tax revenue mobilization in 38 emerging economies from 2000 to 2023. Employing panel autoregressive distributed lag estimators and addressing cross-sectional dependence through the common correlated effects estimators, we examined both the direct effect of the digital economy and its interaction with institutional quality and financial development. The baseline results reveal a negative and significant association between the digital economy and tax revenue mobilization, suggesting that the rapid expansion of digital economic activities may erode tax bases, enable profit shifting, and exacerbate enforcement gaps in settings where tax systems and regulatory frameworks have not adapted to the digital environment. However, when interaction terms are introduced, the moderating roles of institutional quality and financial development emerge as positive and statistically significant, while the direct effect of the digital economy becomes insignificant. Subsample analysis confirms this heterogeneity; the digital economy exerts a positive and significant impact in countries with higher institutional quality and deeper financial development, but remains negative and significant in countries with weaker institutional and financial systems. These findings underscore the importance of complementary institutional and financial reforms to ensure that digital transformation translates into stronger fiscal capacity in emerging economies. JEL Classification C33, H20, O33