The Efficiency Aspect of Taxation in Pakistan: A Computable General Equilibrium Approach

Abstract

This study estimates the efficiency cost of the most important tax categories for Pakistan. This is done by computing the marginal excess burden (MEB) of relevant taxes by employing a Global Computable General Equilibrium model based on the Social Accounting Matrix, 2010–2011. The simulations’ results support the necessity for significant changes to Pakistan’s tax system. The MEB of raising one dollar of tax revenue in the existing tax structure of Pakistan is 13.28 cents. That is, for every dollar of additional tax revenue rise, Pakistan’s economy would incur 13.28 cents of excess burden, which is a deadweight loss to the economy. Moreover, the results also revealed that the tariffs or trade-related taxes have considerably higher distortionary costs per unit of revenue raised. However, the goods and services tax on domestic commodities and income tax have considerably low distortionary costs per unit of revenue raised. This study suggests that the tax authorities of Pakistan should move away from the trade taxes as revenue-raising devices to the broadly based income and consumption taxes on the efficiency point of view.