Impact of Tax Structure Dynamics, Human Resource Development and Distribution of Income on Economic Growth of Pakistan

Abstract

This study is carried out to investigate the impact of taxes on the economic growth of Pakistan. Tax is a compulsory payment to the government by the residents of the nation to cover the cost of services rendered by the government for the general welfare of its citizens. The debate and empirical results regarding the impact of taxes and specifically tax structure is highly controversial for researchers and policymakers. Economic growth is adversely affected by taxes, while some researchers claim a positive effect. Therefore it was felt to investigate the impact of tax structure on the economic growth of Pakistan. To test it empirically, the researcher took the time series data ranges from 1985 to 2021 on tax structure and economic growth. GDP growth is dependent, while tax structure, i.e., direct and indirect taxes, human development index, and income distribution, were selected as independent variables. After ensuring that the variables are stationary, the Autoregressive Distributive Lag (ARDL) approach to co-integration was applied to detect connections between variables. Results found that direct taxes have a positive and significant effect on GDP growth, while indirect taxes have a significant and negative impact on the GDP growth of Pakistan. Also, the impact of HDI on GDP growth is positive and significant, while the Gini coefficient has a negative and significant impact on the GDP growth of Pakistan. It is suggested that to increase the economic growth of Pakistan, direct taxes would be increased, as it will also reduce the Gini coefficient and unequal income distribution, While indirect taxes would be decreased to enhance economic growth. Also, the government should adopt such policies which could encourage human development, as it is crucial for the economic development of Pakistan.