Abstract
Fiscal decentralization is one of the major policy variables to attain economic efficiency. The present study examines the impact of decentralized taxes on the economic growth of Pakistan from 1976 to 2018. For examining the stationarity of variables, Kwiatkowski-Phillips-Schmidt-Shin (KPSS) and Ng-Perron unit root Tests are used. Autoregressive Distributed Lag Approach (ARDL) is used for co-integration among the variables of the model. The results suggest that decentralized tax revenue i.e. income tax decentralization and sales tax revenue with political institutions have growth promoting impact on the economy of Pakistan. With strong institutions, provincial governments can give better results while transferring responsibility of collecting income tax from federal to provincial level.Keywords: Stationarity, Income tax and sales tax, decentralization, political institutions, economic growth.JEL Classifications: H2, H77, O1DOI: https://doi.org/10.32479/ijefi.9724
Highlights
Over the last three decades, most countries have restructured their institutional settings transferring fiscal sovereignty and political power towards sub-national governments
All the variables are in log form excluding decentralization ratios (Table 1)
This study empirically investigates the disaggregated tax decentralization and political institutions implications for economic growth with others orderly variables
Summary
Over the last three decades, most countries have restructured their institutional settings transferring fiscal sovereignty and political power towards sub-national governments. It is generally accepted that decentralization would enhance productivity, and eventually economic growth through detrimental channels (Filippetti and Sacchi, 2016). The association between decentralization and performance of the economy is quite multifaceted. Most of the socio-economic researchers have tried to separate it both empirically and theoretically. The links between fiscal federalism and performance of the economy is built on a number of direct and indirect channels. It may spurs saving, productive and allocative efficiency (Martínez-Vázquez and McNab, 2003). The empirical side, a large number of literature have examined this phenomena with mixed results (e.g., Davoodi and Zou, 1998; Thieben, 2003; Iimi, 2005; Bodman, 2011)
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