Does Laffer Curve Exist in Tax Structure of Pakistan? A Threshold Regression Analysis

Abstract

Laffer curve is a trade-off between tax cuts and tax revenues. The study implies threshold regression to test the existence of the Laffer curve in Pakistan’s economy using time series data for a period of thirty years (1991-2020). The linear association between tax cuts and tax revenues was assessed using simple ordinary least squares technique. The tax structure of Pakistan mainly constitutes two components, direct and indirect taxes. This study examined nature of the Laffer curve using data on direct tax revenue and corporate tax rate. The study supported the evidence of the Laffer curve with a threshold tax rate of 26%. The existing corporate income tax rate in Pakistan is 29% which lies in prohibitive range of the Laffer curve. As a policy measure, the corporate tax rate is recommended to be reduced at least up to the threshold level in order to bring the maximum number of tax evaders and elites under the tax net to enhance the tax revenues of Pakistan.