Taxation Policy Reform and Assessment

2014. Tax Reforms in Pakistan- Political Economy Analysis and Proposed Interventions. DFID Pakistan Advocacy for Strengthened Economic Reform Project.
At 8.9%(provisional) for 2013-14, Pakistan’s tax-GDP ratio is amongst the lowest in the region as well as in the world.
In total, less than 800,000 taxpayers filed a tax return (or 0.4% of the total population – see Table 2), while nearly 40% of these tax filers paid no tax. To make matters worse, the number of tax filers has been on a decline. From a reported 1.5 million in 2011, the number of citizens filing a tax return in the latest tax year (2012-13) has fallen to around 800,000. Another feature of Pakistan’s tax regime is that the source of tax revenue is heavily skewed towards indirect taxation (approximately 65% of total collection), instead of from direct taxes.

Pakistan has been running high fiscal deficits for the past few years, to the order of around 8 % of GDP, and the public debt burden has more than doubled in the space of five years, between 2008 and 2012. The article discusses the main issues with Pakistan’s tax system and chalks the broad principles that should guide the tax reform effort.

Ahmed, V. et. al. (2014). Policy Symposium on Taxation & Energy Reforms.
http://www.sdpi.org/publications/files/Policy_Symposium_on_Energy_and_Taxation_Reforms.pdf
The policy symposium identified major weaknesses and possible remedies for the taxation system of Pakistan. Three major problems with the taxation system in Pakistan have been identified including exemptions, concessions and preferential treatments; tax administration and narrow tax base. A policy brief on tax reforms in Pakistan including designing an exemption phase out plan to be designed by the Government, reconstruction of FBR, change people’s perceptions regarding the taxation authorities of Pakistan.

Ahmed, A. M. &Ather, R. (2014). Study on tax expenditures in Pakistan. World Bank Policy Paper Series on Pakistan.
The paper provides a detailed assessment of tax expenditures in Pakistan, including an appropriate definition, framework and a methodology for measuring tax expenditures for 2011-12. Tax expenditures for fiscal years 2011-12 are estimated to be Rs 511 billion. Using tax data from actual income and corporate tax returns, it has been estimated that tax expenditure worth Rs.153.13 billion have been granted during 2011-12. Tax expenditures worth Rs. 230.27 billion were granted to sales taxpayers during 2011-12. The tax expenditures under Customs have been estimated to be Rs. 128 billion for 2011-12. The tax-to-GDP ratio declined from 10.6 percent in 1999/2000 to 9.5 percent in 2011/12. Over the next five years, Pakistan’s development needs require that the tax-to-GDP ratio should increase by at least 5.0 percentage points over and above the GDP growth rate. This would increase Pakistan’s tax effort to about 14 percent of GDP, roughly equal to the simple average of tax collections in Bangladesh, India, Nepal, Sri Lanka and Indonesia. Some sectors are much more heavily taxed compared to their contribution to GDP than other sectors. An estimate by FBR for the year 2006-07 shows that agriculture accounts for about one-fifth of GDP, yet not more than 1 percent in FBR tax revenues.

The study gives a detail of the major elements of Pakistan’s direct tax system including income tax, sales tax and customs duties. Details of the tax expenditures under income tax, customs, and sales tax are also given. Tax expenditures are calculated using the revenue-foregone method. The study recommends the current rate of withholding tax to be reduced to 4% from 6% while applying it uniformly for all kinds of imports. Estimates based on customs data for year 2011-12 indicates additional revenue of Rs. 9.37 billion if uniform rate of 4% is applied on taxable imports. The study makes a set of recommendations including the withdrawal of SROs, rationalizing the use of SROs, reducing the income tax threshold, withdrawing sales tax exemptions from imports, withdrawal of zero rating of sales tax on diary and meat products etc.

Mazhar, U. (2014). Tax Potential of Reducing Informal Sector Size. Institute of Public Policy.
Economic transactions outside the formal sector indicate revenue loss for the tax authorities. As a percentage of GDP, 10 to 15 percent of unobserved economic activity is routinely observed even in very well documented countries like Switzerland, Luxembourg, and France. But a size of unobserved economy in excess of 20 percent is clearly an indication that a significant slice of economic pie is going unnoticed (see e.g. Gerxhani, 2004). The unobserved economy in Pakistan has been around 33 to 37 percent from late 1990s to late 2000s. The study finds that for a large set of countries over a period of 1999 to 2007, that an increasing share of the unobserved economy indeed increases consumer prices; and decreases government’s ability to raise tax revenue. Results show that a decrease in the share of unobserved sector to 25 percent of the GDP from its current level of 33-37 percent can reduce the rate of growth of consumer prices by 2.7 to 3.0 percent, on an annual basis. By reducing the size of the shadow economy to a more plausible level we can save up to 25 percent of the purchasing power of our consumers that will be akin to increasing their real incomes. The empirical model (Column 1.6) points out that by reducing the size of the unobserved activity to 25 percent, the tax to GDP ratio can reach to 17 percent, ceteris paribus.

2013. Reforming Tax System in Pakistan. Sustainable Development Policy Institute.
The general perception is that the Government is a burden on low-income residents. Low-income residents pay withholding taxes, and sales tax that consumes a larger portion of their incomes. Exemptions and preferential treatments (called the tax expenditure) reduce tax collection by between 2 and 3 percent of GDP each year. Agriculture sector that contributes 21 percent in GDP, contributes less than 1 percent in taxes. Manufacturing sector, that has a share of 13 percent in GDP, contributes around 52 percent in taxes. Services sector that contributes to 58 percent in GDP, contributes to 37 percent in taxes. Pakistan falls in the league of countries with high tax rates – the corporate tax of 34 percent is amongst the highest in the World. ‘Hard-to-tax’ taxpayers comprise the majority of the population. Around 750,000 individuals paid income tax in 2010 in a country with a total population of over 180 million people.

The total revenue (tax and non-tax revenue) is around 13 percent of GDP, which is lowest amongst emerging economies. Due to low revenue, the Government expenditure on health is around 0.7 percent of GDP and on education less than 2 percent of GDP. Other specific problems with the tax system are also given in the study while shedding light on the tax gap. Several specific recommendations are given in the report including those on agricultural tax, corporate tax rate, VAT, role of FBR etc.

Pasha, A. G., Pasha, H. A. (2013).The Future Path of Tax Reforms in Pakistan.Lahore School of Economics.
This article describes Pakistan’s taxation system at the provincial and federal level followed by an analysis of the factors contributing to the exceptionally low tax-to-GDP ratio. They also assess the level of tax rates, the magnitude of tax expenditures (revenue losses due to concessions and exemptions in the tax code), and the extent of tax evasion. The article provides salient features for federal taxes including income tax, sales tax, customs duties, excise duties and provincial taxes including sales tax on services, stamp duty, land revenue, motor vehicles tax, urban immovable property tax. Tax rate was brought down dramatically by the military government (Musharraf regime) to be reversed somewhat by the subsequent democratic government. Details of reduction of effective taxes are given in the report. The exemption granted to capital gains from shares led to a revenue loss of PRs 1,000 billion between 2003/04 and 2006/07 (Bari, 2012). Table 7.7 provides a detailed description of the major tax expenditures in Pakistan and their percentage share.

There is empirical evidence to support the perception that tax breaks in Pakistan disproportionately benefit the rich and powerful, including the feudal class, the textile lobby, trading community, property owners, and investors in shares. Tax exemptions and concessions in direct taxes (income, capital gains, and property taxes) account for a tax expenditure of almost PRs 260 billion, equivalent to 46 percent of the total. The duty structure needs to be rationalized by adhering to the principle of standard statutory rates to enable proper cascading by the level of value added. In the case of the sales tax, the strategy must consist primarily of broadening the tax base. There is reason to believe that the tax burden has become less progressive since 2007-08. Tax evasion is rampant in Pakistan, more than 60 percent of parliamentarians do not file their tax returns. The paper proposes other recommendations for indirect and direct tax collection to raise revenue yield in the next two years by over 2 percent of GDP.

Ahmed, E., Jalil, A. &Idrees, M. (2013). Almost Ideal Demand System And Uniform Taxation In Pakistan: Econometric Evidences For Consumer Goods In Pakistan, 1984-2008.
http://www.usc.es/economet/journals1/aeid/aeid13215.pdf

The authors estimate demand system for six composite goods by employing “almost ideal demand system” for Pakistan. This paper uses pooled time series and cross sectional data for the years 1984- 2008, taken from HIES to estimate consumer demand system for Pakistan and draw quantitative implications of replacing the existing tax structure by a uniform tax package in which the total tax collection remains unchanged. They analyze the welfare implications of tax reforms that replace the existing tax structure by uniform taxes on all goods. The parameter estimates of the model used in the paper satisfied the theoretical restrictions. In particular, all expenditure elasticities turned out to be positive and all the own price elasticities are negative with reasonable magnitudes. The authors found that the welfare gain of shifting to uniformity of tax rates from the existing tax structure is substantial. It is equivalent to 10% reduction in total expenditure while the total tax revenue stayed the same. In other words consumers would spend 10% less while the total welfare is kept constant at the existing level.

Cyan, M. R. &Feltenstein, A. (2013). A computational general equilibrium approach to sectoral analysis for tax potential: An application to Pakistan.
http://www.sciencedirect.com/science/article/pii/S1049007813000584

This study develops a dynamic general equilibrium model, applied to Pakistani data, in which optimizing agents evade taxes by operating in the underground economy. The cost to firms of evading taxes is that they find themselves subject to credit rationing from banks. The model simulations show that in the absence of budgetary flexibility to adjust expenditures, raising tax rates too high drives firms into the underground economy, thereby reducing the tax base. Aggregate investment in the economy is lowered because of credit rationing. Taxes that are too low eliminate the underground economy, but result in unsustainable budget and trade deficits. Thus, the optimal rate of taxation, from a macroeconomic point of view, may lead to some underground activity. Incorporating a VAT without any other tax reductions greatly reduces the tax compliance of the service sector. After applying the model to Pakistan, and calibrating the model to an 8-year period from 2004 to 2011 they note that it gives a reasonable approximation of Pakistani macro data. A sectoral breakdown of tax data generated by the model is done to estimate tax gaps on a sector-by-sector basis. It is noted that certain sectors are currently paying taxes below their potential, while others may be above their tax potential. These sectoral gap estimates may be used as indicators of where greater tax enforcement efforts should be directed.

Pasha, H. (2013). The State of Economy: Challenges and Response. Institute of Public Policy.
A troubling aspect of the fiscal situation was an increasing portion of the deficit reflected negative government savings (averaging at least 3 percent of GDP over 2008–13). Current expenditures far exceeded current revenues as the tax-to-GDP ratio had stagnated while real public consumption. The government has committed to a fiscal consolidation of 4.5 percent over a three-year period, bringing the fiscal deficit (including grants) to 3.4 percent of GDP by 2015/16. This is clearly an ambitious target: it will require improving the tax-to-GDP ratio from 9.7 percent to 12.4 percent over three years and reducing government expenditures (excluding net lending) from 20.3 percent to 18.9 percent of GDP. Given the slow progress in eliminating SROs and because the Federal Board of Revenue (FBR) is finding it difficult to improve tax collection and broaden the tax net (especially income tax collection) by strengthening the administration. The report goes on to discuss the weakness in tax administration and the IMP medium term macro economic framework projections.

W.r.t. income tax; in 2012/13, of the reported individual tax collection of Rs 652.8 billion (2.8 percent of GDP), over two thirds was from withholding taxes. This implies that the genuine income tax paid by 0.7 million-income recipients was less than 1 percent of GDP. The study suggests that less than half the target group will be in the tax net by 2018. The study also discusses the under taxed sectors and suggests bringing them under the tax net.

Mahmood, T. &Sial, M. H. (2012). The Relative Effectiveness of Monetary and Fiscal Policies in Economic Growth: A Case Study of Pakistan.
http://www.aessweb.com/pdf-files/AEFR, Vol.1, No.4,pp.236-244-1.pdf

In this study the role of monetary and fiscal policies in economic growth of Pakistan is studied using time series data for the period 1973-2008. The data used in the study has been checked for time series properties like stationary, serial correlation and multicolinearity. The objective of this study is to discover the ways by which fiscal and monetary policies can be established to boost economic growth, highlight present Pakistan fiscal and monetary challenges to discover regions which may yield upgrading to the fiscal and monetary framework and consequently increase employment opportunities and the budget revenues in Pakistan. The augmented Dickey Fuller unit root procedure is used to check the time series properties. The Autoregressive Distributed Lag Model technique is used to find the long-run relationship between fiscal /monetary policy and economic growth. The results show that monetary and fiscal policies both play a significant role in the economic growth of Pakistan. The relationship between GDP and Government Current Expenditure (GCE) is found to be negative while, Currency in Circulation (CIR) and Government Development Expenditure (GDE) affect GDP positively in Pakistan’s case.

Keen, M. (2012). Taxation and Development- Again.
http://books.google.com.pk/books?hl=en&lr=&id=IzHuWNWdWv8C&oi=fnd&pg=PP2&dq=Taxation+Pakistan&ots=3wNfIAs2av&sig=EOdyd6PTVaCacTMj2WcSz5LlafE#v=onepage&q&f=false

This paper reflects on three broad lessons of experience: developing countries differ vastly in tax matters, and in ways that are less than fully understood; that the history of big ideas in guiding tax reforms gives mixed evidence, the value of the emphasis placed on the context of informality is limited. The paper also asks whether ideas of state building are likely to lead to practical advice that is different from what is commonly offered now.

Atif, M., Shahab, S. &Mahmood, M. T. (2012). The Nexus between Economic Growth, Investment and Taxes: Evidence from Pakistan.
http://www.oalib.com/paper/2072493#.VHwf4qBvDdk

In this study authors test the impact of taxes, inflation and bank loans on investment and economic growth using a time series model for the Pakistan economy. This paper suggests that taxes do not pose statistically significant effect on economic growth directly, however investments are strongly impacted. The authors suggest that government should lower the taxes on capital stock and the channel of loans to private sector for investment purposes should be effective with proper monitoring of the loans. The study uses the OLS model applied to stationary data while using Johansen’s co- integration. The authors conclude that in Pakistan, government tax revenue does not increase as the tax rate increases. Future studies should incorporate a more detailed analysis of the tax structure and incorporate different categories of taxes and other sources of government revenues.

Pasha, A. G. (2010). Can Pakistan Get Out of the Low Tax-to-GDP Trap? 
http://121.52.153.179/JOURNAL/Special Edition 2008/wwwroot/JOURNAL/LJE 15, SE/08 Dr. Aisha Ghaus Pasha 11-10-10 AC Edited.pdf

Pakistan’s overall tax-to-GDP ratio has remained stagnant at around approximately 10-11% and, in fact, has shown a decline in recent years. Today Pakistan has a lower tax-to-GDP ratio than other Asian countries. This paper explores how Pakistan can get out of the low-tax-to-GDP trap and come close to achieving its revenue targets. Examining the trend factors influencing the trend in total and individual tax-to-GDP ratios over a period of twenty years, the paper concludes that partially successful and inappropriate tax reforms have put Pakistan in this trap. The author provides estimates of the revenue potential. While highlighting that a period of economic slowdown may not be the best time to make a big push on resource mobilization, the paper presents a strategy which aims to not only enhance tax revenues but also make the taxation structure more progressive, broad based and balanced.

Chaudhry, I. S. &Munir, F. (2010).Determinants of Low Tax Revenue in Pakistan.
http://www.bzu.edu.pk/PJSS/Vol30No22010/Final_PJSS-30-2-19.pdf

The authors highlight that low tax to GDP ratio has always been a problem for economic development and one of the reasons for a high budget deficit in Pakistan. In this study, the authors attempt to analyze the determinants of low tax revenue in Pakistan empirically by employing time series econometric techniques over the period 1973- 2009. The authors investigate if economic policies, external variables and social indicators along with elements of tax base can account for a part of the variation in the tax revenue performance in Pakistan. Empirical results of the study suggest that openness, broad money, external debt, foreign aid and political stability are significant determinants of tax efforts in Pakistan with expected sings. The results also indicate that the determinants of low tax revenue in Pakistan are narrow tax base, more dependence on agriculture sector, foreign aid and low level of literacy rates. The authors conclude that Pakistan can generate high tax to GDP ratio by boosting the openness, literacy level, political stability and broadening the tax base and by controlling income inequality, tax evasion and tax exemptions. Tax collection requires consistency in implementation and political stability. The authors stress on the importance of a stable law and order situation since it would result in increased investment and more jobs resulting in greater purchasing power transferring into higher tax collection.

Bahl, R. & Cyan, M. (2009). Local Government Taxation in Pakistan by Roy Bahl and Musharraf Cyan.
https://ideas.repec.org/p/ays/ispwps/paper0909.html

The paper evaluates the current practice of local government taxation and points out structural reforms needed to realize the vision of Pakistan for fiscal decentralization. The paper reviews the structure of local government and local governance, and local budget autonomy. It considers options for reform and evaluates their feasibility. Authors evaluate by examining best practices and by drawing international comparisons. The weakness of this paper lays in a lack of anecdotal evidence. There is no systematic compilation of local government finances in Pakistan, so it is not possible to give an overall quantitative assessment of the importance of local government finance. Hence, the authors rely on anecdotal evidence and a small sample of date specifically gathered for this purpose. The paper concludes that fiscal decentralization is a key component of development policy; it can enhance accountability of local service providers and promote efficiency. If local government finance becomes an important agenda item for the Government, the central and provincial governments need to develop an underlying policy structure that is thought out in detail. The authors also suggest structuring the provincial- local transfer system to provide an incentive for increased local government tax effort. The authors highlight the need to think through the intent of district education and health tax, income tax, urban immovable property tax, professions tax etc. ensuring proper implementation.

Richter, K., Vazquez, J. M. (2009). Pakistan Tax Policy Report: Tapping Tax Bases for Development. International Studies Program, World Bank.

The study gives comparative stats on non-tax and tax revenue. Pakistan’s tax collection has failed to improve since the late 1990s. Structural problems, such as a narrow tax base, tax evasion, distrust of the taxpayer vis-à-vis public institutions, and administrative weaknesses, have taken a toll on tax collection. The tax-to-GDP ratio declined from 10.6 percent in 1999/2000 to 10.0 percent in 2007/08 (Figure I.5). Weaknesses of the current tax system include revenue inadequacy, unfairly favoring certain sectors over others. Given the shortfall in agriculture and services, industry carries the brunt of the tax burden – its tax share is three-times as high as its GDP share. The report recommends increasing the buoyancy of the tax system, broadening the tax bases, reducing distortions and phasing out exemptions.

GST is the most conspicuous underperformer in Pakistan’s tax structure, and hence the most promising revenue yielder in structural tax policy reform. The study provides a detailed way forward/ overall reform package. For facts on the current taxation system, view table III.I. View box III.8 for tax incidence studies on Pakistan. Pakistan’s federal tax gap in 2007/08 is estimated to be approximately 79 percent of actual tax receipts. This sum amounts to over Rs. 796 billion, or some Rs. 4,800 worth of cheating by every man, woman and child in Pakistan. The study suggests ways to close the tax gap including better enforcement, boosting tax morale, and increasing resources devoted to enforcing tax law.

Bahl, R., Wallace, S. & Cyan, M. (2008). Pakistan: Provincial Government Taxation.International Studies Program, Working Paper 08-07, Andrew Young School of Policy Studies, Georgia State University.
https://ideas.repec.org/e/pba104.html

Authors suggest that Pakistan’s intergovernmental fiscal system is out of balance. While provincial governments pay only 7 percent of all taxes they receive 35 percent of all government expenditures. Local residents do not see much connect between the level of taxes they pay to provinces and the expenditure benefits they receive. As a result the government misses out on an important element of fiscal decentralization- taxpayers holding their elected officials accountable. Another dimension of fiscal imbalance is the mismatch between weak tax administration skills of the provincial governments and hard to collect taxes that are assigned. As a result the level of taxes is equivalent to approximately 0.2 percent of regional GDP in each province by comparison with about 10 percent at the federal level. The analysis in the study was based on case studies of Punjab and NWFP provinces, and on data gathered in the course of fieldwork in the two provinces. The authors suggest increasing provincial taxes equivalent to 300 percent in NWFP and 137 percent in Punjab to eliminate deficits. Based on this the author calls for a significant restructuring of the tax system. The report focuses on a comprehensive reform and on piecemeal adjustments to the present system. The authors highlight the need for both federal and provincial government involvement, to put appropriate incentives in place to encourage provinces to implement tax reforms and to lay out elements of a feasible implementation program for these structural reforms.

Thirst, W. (2008). Tax Policy in Pakistan: AnAssessment of Major Taxes and Options for Reform. 
https://ideas.repec.org/p/ays/ispwps/paper0808.html

The author undertakes an evaluation of all of Pakistan’s major tax revenues by drawing upon what are the generally considered norms of good taxation attempting to provide proposals for tax reform. The basic design of corporate income tax was considered fine by the author barring two weaknesses; one problem was poor compliance and the other was exempting small corporations from taxation. The sales tax is set by the FBR that results in instability in the way this tax has functioned. Exemptions in excise tax open the door for wide scale tax evasion and Pakistan has not yet explored “green” excise taxes. The author suggests moving towards a single uniform tariff rate. The “notch” problem i.e. the tax rate applies to discrete slabs of income instead of increments is highlighted. Even if Pakistan moves to incremental taxation it would still be different from the current taxation policies i.e. the world is moving towards flatter rate structures. The paper proposes aligning top marginal income tax rate with corporate income tax rate to avoid encouraging non-corporate forms of business activity. The author also highlights how the wealth tax being generated is a lot less than other similar countries and it is important to shed light on weather wealth is being taxed too lightly.

Hussain, M. H. (2004).On the Causal Relationship between Government Expenditure and Tax Revenue.
http://121.52.153.179/JOURNAL/vol9-NoII/Vol.9,No.2.pdf#page=111

This paper applies the technique of Granger Causality to determine the relationship between total government expenditures and total tax revenue using annual revised estimates. The analysis discovers a firm unidirectional effect from expenditure to revenue suggesting the preference of controlling the spending decisions to reduce the tax revenue-expenditure deficit. In this paper, unidirectional causality running from government expenditure to tax revenues can be seen through political manipulation and then the financial sources are searched to finance these expenditures. Moreover, tax revenue responds quickly to the changes in government expenditure. This would fundamentally be the case where government expenditures are determined through political manipulation and then the financial sources are searched to finance these expenditures. The author proposes shrinking defense, debt servicing and general administration expenses. To increase revenue generation the author proposes increasing the tax base and tackling leakages from tax collection. Results of the study suggest that besides the tax and tariff reform programme of the government which emerged and was enhanced during the 90s, there is a strong need for an expenditure reform curriculum in which comprehensive cost-benefit analyses should be conducted for government expenditures together with the analyses of adopting optimal approach for gradual shifting and reformation.

Shah, Z. (2003). Fiscal Incentives, The Cost Of Capital And Foreign Direct Investment In Pakistan: A Neo-Classical Approach.
http://www.pide.org.pk/pdf/psde 18AGM/Fiscal Incentives.pdf

This paper analyses the attractiveness of Foreign Direct Investment (FDI) in Pakistan with special emphasis on the cost of capital element in effecting the rate of return and the internal cash flow for investment of the investing firms. Using the Jorgenson’s Neo-classical Investment Model the cost of capital is computed after considering the taxation policy and the treatment of invested capital. The paper elaborated fiscal provisions and their implications on the investment environment specifically available to foreign investors in Pakistan. The computed results show consistent and influencing impact of the cost of capital on FDI inflows. The objective of the study is to explore the tax concessions and the response of investors. Incentives for rural industrialization, export processing zones and industrial estates are discussed in the study. The paper argues that fiscal incentives are more appropriate in attracting FDI as these have no direct drain over public resources and increase the after tax return by availing the tax holidays and depreciation allowances. Per unit cost of capital reflects a strong consideration for its effectiveness as regard to inward FDI flows. The study concludes that the emergence of globalization and a consistently growing environment for international competition in resource utilization needed required elements of acceptance. Secondly, the resource gap, declining official inflows and technological advancement can only be achieved by reducing public burden and by the encouragement of private business activities in the country. Third, empirically significant co-efficient of the cost of capital in most of the studies suggests an effective role of the government in promoting investment in the country.

Olekalns, N., Cashin, P. &Haque, N. U. (2003). Tax smoothing, tax tilting and fiscal sustainability in Pakistan. 
http://www.sciencedirect.com/science/article/pii/S0264999301000852

Pakistan has a long history of running fiscal deficits. There are two broad considerations motivating a government to run a deficit — tax smoothing and tax tilting. Tax-smoothing behavior results in fiscal deficits because in the presence of non-lump-sum taxes, optimizing governments seek to minimize the distortionary effects of taxation by keeping tax rates smooth over time, rather than varying contemporaneously with expenditure. Even if it is assumed that expenditures will remain constant over time, obviating the need for tax smoothing, fiscal deficits may arise due to tax-tilting behavior if the government’s discount rate differs from the effective interest rate, as then there is an incentive to shift (tilt) taxation across time. This paper tests a version of Barro’s tax-smoothing model, using Pakistan data for the period 1956–1995. The empirical results indicate that Pakistan’s fiscal behavior is consistent with tax smoothing, as taxes remained relatively constant in response to anticipated changes in expenditure, most likely due to the government’s inability to raise revenue. In addition, its fiscal behavior has been dominated by the stagnation of revenues, large tax-tilting-induced deficits, and the consequent accumulation of excessive public liabilities. An analysis of the time-series characteristics of tax-tilting behavior indicates that the stock of public liabilities is unsustainable under unchanged fiscal policies.

Haq, T. A. (2003). Fiscal strategy for growth and employment in Pakistan: An alternative consideration.
http://www.ilo.int/wcmsp5/groups/public/@ed_emp/documents/publication/wcms_142467.pdf

The author highlights that the emphasis on fiscal contraction appears to have been achieved by cutting down on development and investment expenditures which does not bode well for setting the economy on a path to sustainable long-run economic growth and to the goal of full, productive, remunerative employment that ultimately holds the key to eliminating poverty. The paper explores Pakistan’s fiscal stance in recent years and presents empirical evidence showing that fiscal deficits in Pakistan since 1980 did not appear to have had any detrimental impact on private investment and GDP growth, nor were they necessarily associated with tangible increases in inflation. Furthermore, the study critically finds evidence of private investment – which must ultimately serve as the longer-term driver of growth and employment – being crowded-in by public investment expenditure in Pakistan. The paper finds that exogenous events, in particular those of September 11th, 2001, have allowed the Pakistani Government to elicit increased concessionary external funding and an important rescheduling of foreign debt, whilst remittances and foreign reserves have simultaneously rocketed, implying that space should have been created to finance a 1-1.5 per cent of GDP increase in the fiscal deficit in the short-term, to provide the counter-cyclical stimulus that is so crucially required. This case study was conducted in the context of the Employment Analysis and Research Unit’s development of an alternative macroeconomic policy framework that incorporates employment as its central objective, as advocated in the ILO’s Global Employment Agenda.

Dorosh, P., Niazi, M. K., &Nazli, H. (1961). A social accounting matrix for Pakistan, 2001-02: methodology and results. Working Papers & Research Reports, 2006, 2006-09.
http://72.9.146.122/pdr/index.php/wp/article/viewFile/2400/2373

This paper describes the structure and construction of a social accounting matrix (SAM) for Pakistan for 2001-02. A SAM is an internally consistent extended set of national accounts that disaggregates value-added in each production activity into payments to various factors (e.g., land, labour, capital), and disaggregates household incomes and expenditures according to various household types. Because this Pakistan SAM is designed for analysis of the links between growth and rural poverty, agricultural activities, agricultural factors of production, and rural household accounts are more disaggregated than are those for urban activities and households. Rural household groups in the SAM are split according to three regions (Punjab, Sindh, and Other Pakistan) to capture the large differences in the structure of agricultural production and incomes across Pakistan. On average, household incomes in the SAM are 2.1 times greater than household expenditures in the HIES Survey, reflecting the apparent substantial under-reporting of expenditures (particularly on services) and informal sector incomes in the HIES and other household surveys. Agricultural factor incomes as calculated in the SAM account for only 23 percent of total factor incomes in Pakistan, but 60 percent of total factor incomes for agricultural households. 91 percent of agricultural incomes derive from land, water, own-farm labour, or livestock; earnings of hired labour and (non- livestock) agricultural capital account for only 9 percent of agricultural incomes. Incomes of large- and medium-farm rural households, calculated using land area cultivated, data from the Agricultural Census, and other data, are significantly higher than indicated in household surveys.