Impact of Taxation on Economic Growth: Empirical Evidence from Pakistan

Abstract

Purpose: Governments rely on taxes, but a high tax rate can slow economic growth. Fiscal policy objectives can be achieved most effectively by lowering tax collection costs and boosting economic growth through efficient taxation. This study aims to find the impact of tax revenue on Pakistan's economic growth. Design/Methodology/Approach: The time series dataset spanning 1985–2021 is used for the current analysis. GDP is used as the dependent variable, while tax revenue and other fiscal policy variables like government spending, inflation, gross fixed capital formation and current account balance are used as the explanatory variables. The stationarity of the data is checked using the ADF test. The results of the ARDL bound test, which is used to determine whether there is a long-term link between the variables and a short-term relationship, indicate a long-term relationship. Findings: Current analysis reveals that tax revenue and inflation have a negative and significant impact while government expenditures and gross fixed capital formation have a positive and significant impact on the economic growth of Pakistan. Implications/Originality/Value: According to the study's results, Pakistan's government should ensure that tax rates are set at the right level to bring in enough money to pay for government spending that helps the economy grow.