Determinants of Low Tax Revenue in Pakistan

Abstract

Low Tax to GDP ratio has always been a problem for economic development and one major explanation of high budget deficits in Pakistan. In the present study, an attempt is made to analyze empirically the determinants of low tax revenue in Pakistan by employing time-series econometric techniques over the period 1973-2009. This study investigates whether economic policies, external variables and social indicators along with elements of tax base can account for part of the variation in the tax revenue performance in Pakistan. The empirical results suggest that openness, broad money, external debt, foreign aid and political stability are the significant determinants of tax efforts in Pakistan with expected signs. The results also indicates that the determinants of low tax revenue in Pakistan are narrow tax base, more dependence on agriculture sector, foreign aid and low level of literacy rates. Finally, it is concluded that Pakistan economy can generate high tax to GDP ratio by boosting the openness, literacy level, political stability and broadening the tax base and by controlling income inequality, tax evasion and tax exemptions.