Taxes and economic growth: an empirical analysis of Pakistan

Abstract

he study empirically investigates the relationship between total tax revenues and economic growth in Pakistan. For estimation annual time series data from 1974 to 2010 is used. The main purpose of the research is to find long run and short run relationship in-between total tax revenues and economic growth. Auto Regressive Distributed Lag (ARDL) bounds testing approach for co-integration, is applied to estimate, the long run and short run relationship, among the variables. Total tax revenues have negative and significant effect, on economic growth, in long run. Due to one percent increase in total taxes, economic growth would decreased by -1.25 percent. ECM coefficient of total taxes shows 51 percent speed of adjustment in a year. According to research results, it is imperative to decrease the indirect taxes and to increase the direct taxes, if we want to augment economic growth. Currently contribution of direct taxes, out of whole tax revenues, is only 33 percent, and the share of indirect taxes is 63 percent, while it should be reversed, if economic growth has to increase.