Determinants of Low Tax Revenue in Pakistan

Abstract

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

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