Taxable Capacity and Tax Effort: An Analysis for Pakistan

Abstract

Tax revenue is a major source of income for both developing and developed economies. The primary goal of the present study is to examine the factors of tax revenues in Asian developing economies with GDP levels comparable to Pakistan. Aside from the core goal, other aims include tax effort indices for Pakistan based on regression results from the estimated panel and investigating the impact of financial development and institutional quality on tax performance. Over the period of 1996-2021, a panel dataset of six Asian developing economies including Pakistan, is used. The analysis employs Fixed Effect (FE) and Multiple Linear Regression modeling (MLRM) approaches. The study finds that, for Asian developing economies, agricultural share, manufacturing share, services share and inflation have a negative impact on tax revenues but government expenditures and urbanization have a positive and significant effect on tax revenues. However, intriguing findings are obtained when financial development and institutional quality are included in models. Financial development is most likely is enhancing economy’s tax capacity which might indicate why it has a negative impact on estimated tax effort. The same holds true for the negative sign of institutional quality.