Governance: A Source to Increase Tax Revenue in Pakistan

Muhammad Shahid Hassan,Ayesha Wajid,Muhammad Naveed Tahir,Tarek Tawfik Yousef Alkhateeb,Haider Mahmood,Dimitri Volchenkov

doi:10.1155/2021/6663536

Abstract

Improved governance in any economy indicates government stability, secured law and order, and minimum internal and external conflicts. A higher level of governance may demonstrate the healthy performance of economic activities and tax revenue collection. Hence, it is vital to investigate the relationship between governance and tax revenue collection in any developing country. Therefore, we aim to investigate the impact of governance on tax revenue in Pakistan using control variables inflation and industrial value-added. The Autoregressive Distributive Lag (ARDL) cointegration technique is utilized to find the long- and short-run effects of hypothesized variables on the tax revenue using a period 1976–2019. After employing a cointegration on the hypothesized model, the results expose that government stability, law and order, and internal and external conflicts leave a positive and significant impact on tax revenue in the long and short run. Hence, it is concluded that governance is an essential source in expanding tax revenue in Pakistan. Moreover, industrial value-added and inflation also show positive effects on the tax revenue. On the grounds of these results, it is proposed that the government should make serious efforts to improve governance and industrial activities for better tax revenue collection.

Highlights

Tax revenue is a significant source of government spending capacity
Is ratio was observed lower than 15% in Pakistan throughout this study’s sample period [2]. erefore, it seems pertinent to find the main drivers behind such a low tax revenue collection in Pakistan. is lower tax revenue ratio may be stemmed from the weak governance of developing countries [3]. us, a positive relationship might be hypothesized in the relationship of governance and tax revenue collection
Conclusions and Recommendations is study has analyzed the effect of governance on tax revenue in Pakistan. e study uses government stability, law and order, internal conflict, and external conflict as proxies of governance

Summary

Introduction

Tax revenue is a significant source of government spending capacity. A reasonable proportion of tax revenue to the Gross Domestic Product (GDP) ratio is required for a smooth running of the government machinery. Earlier scholars have emphasized the importance of the proportion of tax revenue to GDP. Kaldor [1] stated that a country needed to collect the tax more than 15% of the GDP. Erefore, it seems pertinent to find the main drivers behind such a low tax revenue collection in Pakistan. Is lower tax revenue ratio may be stemmed from the weak governance of developing countries [3]. Us, a positive relationship might be hypothesized in the relationship of governance and tax revenue collection. Bird et al [3] pointed out supply-side and demand-side factors that influence the tax-to-GDP ratio. Democracy and transparency would help to increase tax revenue even if the tax rates are low

Objectives

Results

Conclusion