Taxes, Private Credit and Income Inequality Nexus in Pakistan: A Time Series Analysis

Abstract

Income inequality can be tackle with different Govt. policies such as spending on health, taxation education and good governance. But taxation has been a debatable subject in developing and developed economies. In developing countries poor paid a huge percentage of their income in taxes that created inequality. Direct taxes increase revenue of government as they help to tackle income inequality. The present study checked the impact of taxes, private credit on income inequality in Pakistan. The study used time series data (1973-2021) of Pakistan and used ARDL model with dependent variable is Gini Coefficient and other variables are Total Direct Tax, Total Tax Revenue, Gross Domestic Product, GDP per capita, Private Sector Credit, Labor Force Participation. The study concluded that Pakistan total direct tax revenue was found to tackle income inequality which means the Pakistani tax system has ability to tackle the level of income inequality. Pakistan tax system is a viable fiscal tool to tackle the inequality with reduces the several leakages, strengthen the administrative mechanism, reduce tax burden on poor and increase tax burden on elite class.

Keywords: Income Inequality, Direct Tax, Pakistan Taxation System, Time Series Data, Gross Domestic Product.