Do Financial Inclusion and Governance Quality Promote Tax Revenue in European Countries?

Abstract

Tax revenue determinants have become highly important issues in the empirical literature. Despite growing attention to the role of governance and financial inclusion, limited empirical evidence exists on how these factors jointly influence tax revenue in the context of European economies characterized by significant economic heterogeneity. This creates a critical research gap to understand the distributional dynamics of tax performance. Recently, some studies have explored the linkage among governance, financial inclusion in the banking sector, and tax revenues; however, most have not examined European economies. In this context, this work aims to provide fresh evidence by exploring the impact of economic growth, governance quality and financial inclusion on tax revenues in the case of European economies using the recently developed Methods of Moments Quantile Regression (MMQR). The findings of this study show that financial inclusion positively affects tax revenues in lower, mid, and upper quintiles. Besides, the findings show that governance quality positively influences tax revenues across all the quintiles. These findings suggest that expanding financial access and strengthening institutional quality not only enhance tax collection on average but also improve tax capacity across economies with varying revenue levels, thereby reducing disparities in fiscal performance. These findings affirm the role of governance and financial inclusion in sustaining European countries’ taxation performance. From this perspective, this study contributes to the literature by integrating financial inclusion and governance within a distributional econometric framework, offering deeper insight into tax revenue determinants. From the policy perspective, these results imply that policymakers should promote inclusive financial systems and strengthen governance structures to broaden the tax base, reduce informality, and enhance fiscal stability. Based on the obtained findings, the study recommends that policymakers must use the governance and financial inclusion channels in their taxation strategies.