Professional Documents
Culture Documents
ABSTRACT
This paper estimated determinants of tax revenue in Pakistan in the era of trade liberalization using time series data from
period 1975-2010. Econometric methods were employed to estimate the impacts of various factors on trade taxes and tax
revenues. Results showed that exchange rate and population were negatively related to tax revenue, while trade openness,
trade share and GDP showed positive relation with tax revenue. Urbanization also showed significant and positive result in
relation to tax revenue. Thus, monetary and fiscal policies should be designed to exploit the available potential opportunities in
the era of trade liberalization. 2012 Friends Science Publishers
Key Words: Trade liberalization; Tax revenue; GDP; Exchange rate
INTRODUCTION
Globalization is considered to have severe internal and
external imbalances in the developing countries, including
Pakistan. Trade liberalization involves the unification and
relaxation of tariff rate by promoting the level of exports
and depreciation of exchange rate (Rajaram, 1994). Trade
interventions serve the dual purpose of protection and
revenue generation. It is mainly thought to be linked to tax
revenue, though the precise relationship depends on several
variables, including the nature of trade liberalization and the
response of imports and exports to liberalization as a result
of its effect on international trade tax revenue.
Taxation structure in Pakistan depends upon the
applied tariff rate. Federal Government implement income
tax, sales tax, custom and excise duties to increase the
revenue collection in the form of direct and indirect taxes.
Trade liberalization in Pakistan can be classified into export
promotion and import substitution. Pakistans government
eliminated quantitative restrictions, regulatory duties and
tariffs in order to promote the trade. Maximum tariff has
been reduced to 25% from 80% in 1995 (Khan, 1995). The
average import weight tariff rate in 2006-2007 was around
8%. Rao (1999) studied the impact of changes in openness
measured by the ratio of trade taxes affecting imports and
exports related to trade and changes in the tax base of trade
to gross domestic product ratio on overall trade tax revenue.
Greenaway (1984), Ram (1994) and Tanzi (1989) have all
found a positive relationship between the trade openness
and trade tax revenue. Trade liberalization leads to the
reduction of import duties, and thus would be likely to be
linked to reduce international trade tax revenue. Ebrill et al.
To cite this paper: Mushtaq, S., K. Bakhsh and S. Hassan, 201x. Estimating impact of trade liberalization on tax revenue in Pakistan. J. Agric. Soc. Sci., 8:
148150
TRADE LIBERALIZATION AND TAX REVENUE / J. Agric. Soc. Sci., Vol. 8, No. 4, 2012
Table I: OLS estimates of determinants of tax revenue
Variables
Constant
Ln population
Ln GDP
Ln Urbanization
Trade openness
Trade openness2
R-Square
Adjusted R-square
No. of Observation
Coefficients
-16.72 (6.42)
-3.90 (1.27)
0.84 (0.23)
13.3 (3.08)
0.06 (0.01)
-0.001 (0.00)
0.99
0.97
36
t-values
-4.16
-3.07
3.56
4.24
4.52
-4.11
Significance
0.00
0.00
0.00
0.00
0.00
0.00
t-values
-2.30
-1.57
-0.56
2.38
3.12
-1.75
0.67
-1.74
Significance
0.02
0.12
0.57
0.02
0.00
0.09
0.50
0.09
149
CONCLUSION
The present studies employed econometric methods to
determine the impact of trade liberalization on tax revenue
in Pakistan using timer series data. Results of the study
showed that trade openness is necessarily important if a
country wants to increase the tax revenue as there exists a
positive relationship between trade openness and tax
revenue. Further, urbanization, trade openness and gross
domestic product have positive impacts on tax revenue,
while population is negatively related to tax revenue. Thus,
greater efforts should be made to increase the economic
growth and urban population in order to increase the tax
revenue. To achieve this outcome, laws and regulation
regarding tax collection must be specified, modernized and
more transparent to increase the overall tax revenue by
bringing more population into tax net. Moreover, trade
openness and tax revenue are positively related to each
other. So, appropriate monetary policies may be needed to
increase tax revenue collection. Pakistan is blessed with
young population and there is a need to exploit this potential
resource through providing them education in order to
prepare skilled labour force and creating job opportunities in
rural and urban areas. It would increase the volume of direct
taxation. Progressive taxation must be implemented to
increase the tax revenue.
REFERENCES
Adam, C., D. Bevan and G. Chambas, 2001. Exchange rate regimes and
revenue performance in Sub-Saharan Africa. J. Dev. Econ., 64: 173
213
150