Is Indirect Taxes Bad for the Poor? Examining the Determinants of Poverty in Pakistan

Abstract

This study investigates the determinants of poverty in Pakistan from 1985 to 2023, focusing on unemployment, inflation, indirect taxes, secondary school enrollment, and total population as key variables. Employing the Augmented Dickey-Fuller unit root test, the analysis finds that while many variables exhibit non-stationary behavior at levels, they become stationary at first difference, ensuring the reliability of time series analysis. The ARDL Bounds Analysis confirms the significant relationship between poverty and its predictors, indicating that changes in these variables markedly impact poverty levels. The estimated long-run and short-run results highlight the significant roles of inflation, secondary school enrollment, total population, and unemployment in influencing poverty, with diagnostic tests affirming the model's robustness. The study underscores the positive relationship between secondary school enrollment and poverty reduction, advocating for increased investment in education. The analysis reveals that indirect taxes do not significantly impact poverty levels, yet suggests a review of the tax structure to ensure it does not disproportionately burden low-income households. A progressive tax system could aid in wealth redistribution and support poverty reduction efforts. The positive correlation between total population and poverty levels indicates that rapid population growth strains resources and infrastructure, highlighting the need for effective population management strategies, including family planning programs and investments in healthcare and education. Unemployment's significant impact on poverty calls for targeted interventions to create job opportunities. Policymakers should promote economic diversification, support SMEs, and implement active labor market policies such as job training and placement programs. While higher inflation rates are associated with lower poverty levels in this analysis, maintaining inflation within a manageable range is crucial to avoid eroding purchasing power and harming economic stability. The study advocates for continuous and comprehensive data collection to enable timely and evidence-based interventions, enhancing the effectiveness of poverty reduction strategies. Prioritizing inclusive economic growth, fostering an environment conducive to investment, innovation, and entrepreneurship can create jobs and reduce poverty, ultimately supporting sustainable socio-economic development.