Factors Affecting Tax Percentage of GDP in Pakistan

Abstract

The issue of the generation of tax revenue has been one of the most imperative things that all most all the countries in the world have faced and are facing currently too. The struggle for the generation of tax revenue that is enough for the development of a country, especially in the case of developing countries has been the most prominent one. Pakistan is also among the developing countries that have faced the issue of revenue generation from the time it came into being in 1947 and is still going through the issue. The issue can only be resolved if the factors affecting tax revenue generation are evident enough and for this exact purpose, this study was done. The effect of some important factors on our dependent variable, tax as a percentage of GDP were empirically studied. For this, four independent variables were taken, it includes “political instability” for which a dummy variable was used, 0 for democracy and 1 for martial law, was taken. Secondly, “trade openness” measured by adding imports and exports and dividing the value by GDP, thirdly, “inflation rate” which is measured using consumer prices annual percentage change and lastly, “agriculture sector share in GDP”. ARDL technique was applied to our time series data of 1990 to 2020. The results say that political instability, trade openness and inflation rate are significant and negatively related to tax percentage of GDP. However, the agriculture percentage of GDP has an insignificant impact on tax percentage of GDP. Keeping the results in mind recommendations are given so that Pakistan’s tax revenue as percentage of GDP can be improved which will result in economic growth of the country and standards of living of the country will be eventually improved.