Determinants of Low Tax Revenuein Pakistan

Abstract

Low tax-to-GDP ratio has always been a problem for economic development and a major explanation for high budget deficits in Pakistan. In the present study, we attempt to empirically analyze the determinants of low tax revenue in Pakistan by employing time series econometric techniques during the period 1973-2009. This study investigates whether economic policies, external variables and social indicators together with elements of the tax base can explain some of the variations in tax revenue trends in Pakistan. The empirical findings suggest that openness, ample money, external debt, foreign aid and political stability are the significant determinants of fiscal efforts in Pakistan with expected signals. The findings also indicate that the determinants of low tax revenue in Pakistan are a narrow tax base, greater dependence on the agricultural sector, foreign aid and low level of literacy. Finally, it is concluded that Pakistan's economy can generate a high tax-to-GDP ratio by increasing openness, literacy level, political stability, broadening the tax base and controlling income inequality, tax evasion and exemptions tax.