Tax revenues are one of the most important fiscal policy tools adopted by governments to stabilize the economy and promote growth. It is a major source of funding for public spending and directly and indirectly affects the performance of financial markets. In Iraq, the financial market faces many challenges that affect its general index, such as political turmoil, lack of transparency, and limited financial instruments. Therefore, it is necessary to study the relationship between tax revenues and the performance of the general index of the  financial market ISX60 to understand the impact of tax policy on investor confidence and market efficiency.

Research Problem

The general market index is one of the vital tools that reflect the health and stability of the national economy, as it is affected by many economic and financial factors that directly and indirectly affect the level of tax revenues. The components of this indicator vary in terms of the performance of different economic sectors such as industry, trade, and services, and the GEM plays an important role in determining the ability of the authorities to collect taxes. However, the challenge faced by economic institutions lies in the market's weak investment environment and its inability to utilize all tax revenues in diversified investment portfolios, which hinders the proper management and growth of funds. This situation leads to low rates of return on strategic projects that boost the national economy in the long term.

However, the impact of tax revenues on the general index requires a careful study of the factors affecting its performance, and the importance of directing revenues towards sustainable development investments. According to the above, the following questions arise:                

• What is the extent of the direct impact of tax revenues on the performance of the overall market index

• What is the extent of the indirect impact of tax revenues on the performance of the overall market index

• How might the trajectory of the overall market index be    affected   by    the    investment    of  tax revenues

• What are the factors that may lead to a decline in overall market performance and thus negatively impact tax revenues

Importance of the Research

The current research sheds light on the close relationship between tax revenues and the general market index, as the importance of the research comes from the importance of the role of the general market index in assessing the health of the economy as it contributes to determining the extent of the state's ability to collect taxes based on the performance of the market. It also demonstrates the impact of economic and financial factors on tax revenues that help direct those revenues towards sustainable developmental investments.

Research Objective

The current research aims to highlight the following:

• Explain the role of the effectiveness of tax revenues in enhancing the performance of the general market index.

• Highlight the challenges associated with the efficient utilization of tax revenues.

• Emphasize the need to study the factors affecting market performance to ensure sustainable economic stability

• Explain the role of the performance of different economic sectors and their impact on tax revenues

Research Hypotheses

• Second main hypothesis: There is no statistically significant correlation of tax revenues in enhancing the performance of the general market index

• The first main hypothesis: There is no statistically significant effect of tax revenues on the performance of the general market index

Population and Research Sample

The Iraq Stock Exchange represents the research population, while the research sample consists of data on the tax revenue variable and the general market index variable, as the research sample includes 216 monthly observations during the period 2005-2023.

Research Boundaries

• Temporal Boundary: The temporal boundary is the period 2005-2023

• Spatial Boundaries: The independent variable includes tax revenues and the dependent variable is the general market index obtained from the Al-Arraq Securities Market

The Conceptual Framework of the Research

The Concept of Tax Revenue: Strengthening tax systems in developing countries is essential to stimulate domestic resources towards development and reduce dependence on foreign aid, as taxes contribute to reducing the rates of disparities between segments of society as one of the best financial policy tools that are used to redistribute income in the local economy [1]. Revenue is defined as the increase in net worth resulting from financial transactions [2]. For general government organizations, there are four main sources of revenue: taxes and other mandatory transfers levied by economic units, property income from ownership of assets, revenue from sales of goods and services, and voluntary transfers received from other units [1]. Revenues are divided into two main types: tax revenues and non-tax revenues [3]. Tax revenues constitute the largest share of total revenues for many government organizations, consisting of mandatory transfers imposed by general government units on the rest of the economy [4]. Some mandatory transfers, such as fines, penalty fees, and most social security contributions are excluded from tax revenues. Refunds and corrections to previously erroneously collected tax revenues are also considered financial transactions that appear to reduce the net wealth of the taxing government organization. But more accurately, adjustments allow for the correction of excessive increases in net worth that were previously recorded. Thus, these transactions are treated as negative revenues. Note that net wealth can be calculated by deducting total liabilities (including debts and other financial obligations) from total assets (property and resources) [5]. Tax policy is defined as a set of integrated programs, procedures and comprehensive strategies that the state prepares and implements, using available or expected tax resources, with the aim of achieving positive results at the economic, social and even political levels. And to avoid undesirable negative effects that may result from an unsound tax system [6]. Tax policy is a tool for achieving the goals of sustainable development and achieving social justice, through the fair distribution of revenues among the various segments of society, taking into account the required balance between stimulating economic growth and ensuring the stability of public finances [7].

Theories of Taxation

There are many theories that imposed the concept of taxation and supported its collection, and these theories can be basically divided into three categories as follows [8]:

• Economic surplus theory: Taxation should be imposed on surplus, which is physically and morally necessary to ensure the orderly utilization of factors of production

• Bene fit theory of taxation: This theory is based on the idea that individuals should pay taxes according to the cost of the state in providing benefits. One of the positives of this theory is that the tax represents people's demand for public service. The main criticism of this theory is that benefits and costs cannot always be appropriately measured

• Ability to pay theory: This theory is based on equality and appropriateness. People should contribute to the state based on their physical and financial capacity This capacity can be income, expenditure, etc. This theory       deals       with       two       types     of justice

• Horizontal justice: Equals should be treated equally, such as imposing the same taxes on people facing the same economic circumstances

• Vertical justice: Unequal treatment of people with different circumstances

The Importance of Taxes

One of the founders of classical economics, economist Adam Smith was one of the first to indirectly address the concept of fairness in income distribution. In his famous 1776 book The Wealth of Nations, Smith pointed out that certain government interventions, such as taxation, may be necessary to meet the needs of the less financially able in society. These interventions can be seen as a step towards achieving distributive justice within a free market system. After John Maynard Keynes, Thomas Piketty and others, many studies have highlighted the pivotal role of taxation in rebuilding economic structures, promoting sustainable development, and achieving social justice [9].  and until now, there are many studies that draw attention to the importance of the role that taxes play in rebuilding economic structures, developing infrastructure and achieving social justice in countries. [10] indicated that the impact of high tax rates on companies may reduce the return on invested capital, and [11] stated that varying and increasing tax rates may lead to changes in the structure and balance of capital, as companies may postpone investments or reallocate resources to minimize the tax burden.

If tax revenues are used to develop human capital, tax breaks can have a positive impact as governments incentivize employers to invest in human resources and develop the capabilities and skills of workers. In addition, tax exemptions can have a positive impact as governments incentivize employers to invest in human resources and develop the capabilities and skills of workers. However, it is important to consider the balance between work and leisure, as high taxes on investment income may affect individuals' decisions to participate in the labor market. The higher the tax rate on income from investments, the more reluctant individuals may be to work in exchange for choosing leisure and reducing working hours rather than paying high tax rates [12]. High taxes on labor income affect individuals' decision to participate in labor markets and their willingness to work, as measured by the balance between work and leisure. In other words, the higher the taxes on labor income, the more reluctant individuals may be to work or they may choose to reduce their working hours in favor of leisure or personal activities, based on the economic returns to these choices. In other words, the higher the taxes on labor income, individuals may hesitate to work more or may choose to reduce working hours in favor of leisure or personal activities, based on the economic returns resulting from these choices [13]. Finally, tax revenues contribute to financing the public budget by covering all practitioners of economic activities with income tax [14].

The role of tax policies in improving the performance of the general   market index comes through three mechanisms:

• Improving Productivity: Improved planning in the preparation of tax policies can help remove some of the fluctuations that hinder the work of the most productive companies and thus lead to improved productivity rates and    economic         growth       of       the         country [15]

• Reducing Taxes on Investment: Tax policies that support the growth of companies can help encourage investments by following some tax incentives such as reducing tax rates or providing tax exemptions, this encourages companies to increase their investments, growth and survival in the market. As large companies listed on the market can help improve financial performance and thus increase the market index [16]

• Minimizing Tax Procedures: Organized planning of tax procedures helps to reduce some administrative costs such as the cost of collecting taxes from companies and improving their investment environment, which enhances their financial performance and thus contributes to improving the performance of the general market index

• Expansion of Tax Bases: Expanding tax bases helps to increase revenues without increasing corporate taxes, which maintains market stability [17]

The ISX60 General Market Index, its Characteristics and Challenges

In the current dynamic and competitive business environment, there is a need to measure the impact of indirect tax revenues on the performance of the general index of the financial market, given its role in guiding fiscal policies and influencing the movement of investment. With economic developments, relying on traditional accounting indicators is no longer sufficient, but market indicators have become an essential tool for assessing financial performance and creating value for various stakeholders [18]. The general market index is defined as a tool for measuring general performance in addition to a number of indicators that are used to measure detailed performance [19], one of the main components of the general index is that it includes shares of 60 companies, which is a small number that cannot be relied upon to give a clear picture of the Iraqi stock market, and these shares are weighed based on their free market value, and the index was launched in January 2004. This index is suitable for conservative investors looking for stability and low to moderate returns over the long term. However, the ISX60 can be used as a reference to create index funds and ETFs to diversify investment. The visibility provided by the ISX60 is not always clear and is due to many political, security, economic and even social upheavals, making it suitable for a limited number of conservative investors while excluding the role of investors looking for high risk in investing to achieve high returns in the long term. Capped indices include both the general market index and the parallel market index. The maximum limit is applied to all components of the index based on the weights of companies determined by their market capitalization. Capped indices are used to limit the dominance of large companies on the index, and the value of the capped indices is calculated according to the following formula [19].

Index Value = (the sum of the maximum free float market values for today divided by the sum of the maximum free float market values for the previous day) x the index value for the previous day)

Characteristics of the General Market Index

The main characteristics that illustrate the main role of the market can be summarized as follows:

• Sensitivity to Economic Changes: The general index is affected by local and international economic changes, such as interest rates, inflation, and political events, making it sensitive to economic fluctuations

• Quantitative Representation of Stocks: It represents each of the following sub-indices

• Market Capitalization: The general index is calculated based on the market capitalization of listed stocks, where the number of issued shares per share is multiplied by the market price per share. This is summed up for all listed companies to determine the total market value [20]

• Relative Distribution: Sometimes, quantitative representation is used by distributing the weight among the companies in the index based on their market size, meaning that larger companies represent a larger share of the index.

• Mathematical Indices: Mathematical tools such as arithmetic or weighted averages are used to calculate the value of an index, such as a weighted average of prices (e.g. the Dow Jones Industrial Average in the U.S.)

• Performance Indicators: Quantitative representation can include calculating ratios such as return on investment, dividend yield, compound annual growth rate (CAGR) and other indicators that are measured in numbers

• Risk Analysis: Quantification also includes calculating the potential risk of markets through techniques such as standard deviation or value-at-risk (VAR) calculation that rely on numbers to estimate volatility and risk

• High Volatility: The general index of the financial market may show significant fluctuations based on changes in the market or an economic sector, making it an important reference tool for investors

• Comparison Tool: The general index is used to compare the performance of capital markets in different time periods or between different financial markets in the world

• An Indicator of the Health of the Local Economy: The general index of the financial market reflects the soundness of the structure of the local economy indirectly, in terms of the correlation of the performance of listed companies with the national economy as a whole [21]

The challenges facing the performance of the general index of the financial

Market in Iraq are diverse and include several aspects, most notably. Political turmoil and economic crises can include one of the most prominent challenges that significantly affect the confidence of investors in the market and the reflection of this on the performance of financial indicators in a negative way [22], and the number of companies listed in the ISX60 financial market is not a large number, which may affect the level of liquidity in the market that may contribute to severe fluctuations in the performance of the general market index [23]. Low development in the administrative and technical apparatus may appear when the lack of information, transparency and non-compliance with financial disclosures and data related to listed companies weakens the ability of investors to make rational decisions [24], and the challenges facing the financial market include regulations and laws unfavorable to stimulate investments in a constantly fluctuating environment as well as the weak regulatory and supervisory framework impedes the development of the market and makes it difficult to apply international financial standards [23]. [25], and finally the limited financial instruments, where the lack of diversification of financial instruments available to investors, such as bonds, diversified stocks and financial innovations, limits investment opportunities and affects the performance of the index [26].

Analytical Framework

The statistical software SPSS, V.23 was used to analyze all data between the research variables and validate the research hypotheses. The current research includes tax revenue as an independent variable and the performance of the ISX60 as a dependent variable [27-29]. 

Based on the ideas and opinions presented in the theoretical part, this research aims to test the first main hypothesis, which states: “Is there a statistically significant relationship between tax revenue and the performance of the ISX60 market index?” In order to test this hypothesis, the output of the SPSS, V.23 statistical program can be relied upon as follows:

In table 1, the results of the simple linear regression analysis indicated the explanation of the relationship between the dependent variable and the independent variable, where the correlation coefficient indicated a weak direct correlation between tax revenues as an independent variable and the performance of the general market index as a dependent variable, as the direct effect of higher tax revenues reflects the government's ability to manage its resources more effectively, which enhances investor confidence in the financial market. However, if the government is facing significant economic or political challenges, the increase in tax revenues may not be enough   to   sustainably   boost   confidence,  leading  to volatility in the financial market. Hence, researchers recommend studying the indirect impact of tax revenues as a tool of fiscal policy [31].

Table 1: Model Summary

a. Predictors: (Constant), Tax

Table 2:ANOVA^a

a. Dependent Variable: index, b. Predictors: (Constant), Tax

Table 3:Coefficients^a

a. Dependent Variable: index

Based on the results of the table, there is a positive linear correlation between tax revenues and the performance of the general market index. The null hypothesis can be rejected and the alternative hypothesis cannot be rejected, stating that there is a statistically significant correlation between the current research variable.

Table 2, shows the analysis of variance used to indicate the significance of the linear regression model and the fit of the current research data, where the t-statistic indicates that the current hypothesized model is considered a good fit. The table also indicated that there is a significant relationship between the independent variable tax revenue and the dependent variable the performance of the general market index. When comparing the calculated T-test value with the tabular T value, we find that the calculated T value of 29.797 is greater than the tabular T value of 0.000 at the significance level of 0.05.  For the purpose of testing the significance of the estimated parameters of the simple linear regression model.

The results of Table 3, indicated the significance test of the estimated parameters alpha and beta of the linear regression model, and the results showed that the value of beta as a non-parametric coefficient for the tax revenue variable amounted to 7.5, which indicates a positive but not insignificant presence of tax revenue in the performance of the general market index. The remainder of this value as a standardized coefficient for the estimated parameter beta, which amounted to 0.350, is due to the influence of other economic variables that were not mentioned in the current research model. When comparing the calculated F test value with the tabular F value, we find that the calculated F value of 5.459 is greater than the tabular F value of 0.000 at the significance level of 0.05. Based on the results of Table 2 and 3, the null hypothesis can be rejected and the alternative hypothesis that there is a statistically significant effect between tax revenues and the performance of the general market index can be rejected. From the above, the current research can show that the impact of tax revenues on the performance of the general market index ISX60 depends on how the tax policy is set up and the use of these revenues in improving economic conditions and the extent of the market's response to changes in   fiscal   and   economic policies in the country.

• The Iraqi economy has been suffering from a set of investment environment issues for many decades due to the wars that Iraq fought and the concurrent lack of investment culture and investment climate for the citizen in general. In addition to the deterioration of many industrial and agricultural sectors that did not contribute to the development of the financial sector directly

• It is necessary to intensify efforts to find an integration between strategic and tactical plans in the development process, and that there is a real work in issuing laws and legislation that support financial markets as a parallel route to real investment in reaching productivity and filling the deficit in the budgets

• Reconsider the tax rates imposed on individual and corporate income as an important financial resource in financing investments in the financial markets

• Disclose the cases of tax evasion for most financial transactions resulting from the lack of transparency in the preparation of financial statements for most of the ongoing financial transactions in companies

• According to the theoretical framework, there were a number of theories that advocated the need for income taxation as an attempt to redistribute income among individuals, but some theories did not clarify the basic idea that taxation should be fair according to the financial conditions of individuals and the prosperity of companies

• Limited financial instruments limit investment opportunities, leading to a negative impact on the performance of the general market index

• Lack of sophistication in administrative and technical systems, transparency, and financial disclosure impair the ability of investors to make informed decisions

• In addition to weak oversight and regulation, it is an obstacle to the development of the financial market in accordance    with    international financial standards.

Recommendations

• The Iraqi government should adopt economic policies aimed at improving the investment environment in order to enhance the culture of citizens on the importance of the industrial and agricultural sectors by legislating and implementing several legislative and regulatory reforms to ensure economic growth and sustainability in the long term

• It is necessary to intensify efforts to find an integration between strategic and tactical plans in the development process, and to focus on issuing laws and legislation that support the growth and development of financial markets, as a parallel tool to real investment in reaching economic productivity and addressing budget deficits

• Taxes are an important financial resource, and it is necessary to reconsider the tax rates imposed on individual and corporate income, as increasing tax rates contributes significantly to financing investment projects, diversifying revenues, and filling the budget deficit

• It is necessary to combat the lack of transparency that may appear in the financial statements and to take strict measures and legislation that limit the phenomenon of tax evasion

• It is necessary to focus in practice on blending these tax theories in a way that promotes tax justice and strikes a balance between the need to stimulate economic development and collect the revenues needed to finance public services, while ensuring that the tax system can be measured and applied in a more transparent and fair manner

• The need to work on diversifying financial instruments in the financial market by introducing new investment products such as bonds, investment funds, and derivatives, in order to enhance the attractiveness of the market and increase investment opportunities

• Strengthening the administrative and technical infrastructure by modernizing trading and settlement systems, adopting good governance standards, and enhancing transparency and financial disclosure to ensure the flow of information accurately and quickly, which helps investors make rational decisions

Strengthening the regulatory framework by introducing financial laws and legislation in line with international standards and in harmony with the changes in the current business environment, while ensuring the implementation of more effective regulatory mechanisms to reduce the expected risks and achieve a more stable and attractive investment environment.

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