Saima Saqib¹, Dr. Tariq Ali², Muhammad Faraz Riaz^2,, Dr. Sofia Anwar², Amir Aslam²

This paper analyzes the effects of taxes on economic activity in Pakistan. Economic activity is examined through real GDP, consumption and investment, and for each from the said proxies a different econometric model is developed for analysis. Tax to GDP ratio for growth model, sales tax for consumption model and income tax for investment model are used. Real GDP, total investment and household consumption expenditures are used as dependent variables. Time series data from 1973 to 2010 are used for empirical analysis. Keeping in view the alternate order of integration of different variables ARDL approach to co-integration for growth model is utilized. While Johansen’s co-integration technique is used in investment and consumption models as all the variables involved in these said models are found to be I(0). We found negative effects of tax to GDP ratio on real GDP, negative effects of income tax on investment and negative effects of sales tax on household consumption expenditures. Finally, we concluded that the present level of taxation in Pakistan needs to be revised carefully as this has negative effects on economic activity in Pakistan.

growth, investment, consumption, ARDL, ecm term