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Abstract

In light of the recent financial crisis and economic downturn, policymakers are looking at other options to raise tax revenue. One such option proposed is a financial transaction tax which would tax various cross-border transactions such as banking or securities transactions. Yet, economic growth is arguably the better option for increasing revenue. One might further argue that a tax will lead to less revenue through reduced growth resulting from investors investing money in other tax free arenas. Therefore, this study looks at the relationship between financial openness and annual real GDP per capita growth to ascertain the effect of financial openness restrictions on economic growth. Specifically, regressions were run examining thirty-four developed countries and the impact of financial openness, using the Chinn and Ito (2012) openness index, on annual GDP growth. As a result, openness was found to be statistically significant in relation to annual GDP growth. Furthermore, openness was found to have a positive effect. In light of the results, a recommendation is made that policymakers should avoid transactions taxes as an option to increase tax revenue and focus on alternative policies to encourage growth which will lead to growth in tax revenues.