Taxation Reforms: A CGE-Microsimulation Analysis for Pakistan

PEP Working Paper serie 2010-12

31 Pages Posted: 28 Sep 2010 Last revised: 11 Jul 2018

See all articles by Saira Ahmed

Saira Ahmed

Quaid-i-Azam University - Pakistan Institute of Development Economics (PIDE)

Vaqar Ahmed

Sustainable Development Policy Institute (SDPI)

Ahsan Abbas

Quaid-i-Azam University - Pakistan Institute of Development Economics (PIDE)

Date Written: September 27, 2010

Abstract

This paper provides an ex ante assessment of taxation reforms being considered in Pakistan, in order to widen the tax base and rationalise the rate structure of different taxes. Amongst the main proposals, those focusing on sales tax and agricultural direct taxes seem relatively more attractive. The former has the highest share in indirect taxes and is also easier to collect, while the latter is intended to bring the presently exempted agricultural incomes into the tax net. As a first step, we study the general equilibrium effects of existing taxes by removing them from the system one at a time. In the second step we study the micro-macro impacts of four policy experiments: a) increasing sales tax rate by 33 percent; b) applying a 10 percent sales tax on presently zero-rated goods; c) increasing sales tax rate by 33 percent and bringing the services sectors in the sales tax net; and d) increasing sales tax rate by 33 percent, bringing the services sectors in the sales tax net, and imposing a 5 percent flat tax on agricultural incomes. In the third step we calculate the lost revenue due to evasion and avoidance. Results from experiments indicate the tough choices for policy makers in trying to improve the currently low tax to GDP ratio in Pakistan. Almost all simulations result in a decrease in investment levels, reduced consumption, and an increase in poverty. We thus recommend a gradual approach to tax reform that can make the adjustment process less painful.

Keywords: Taxation, Microsimulation, General Equilibrium, Poverty, Inequality, Progressivity, Redistribution

JEL Classification: H22, D58, C51, C81, I32

Suggested Citation

Ahmed, Saira and Ahmed, Vaqar and Abbas, Ahsan, Taxation Reforms: A CGE-Microsimulation Analysis for Pakistan (September 27, 2010). PEP Working Paper serie 2010-12. Available at SSRN: https://ssrn.com/abstract=1683451 or http://dx.doi.org/10.2139/ssrn.1683451

Saira Ahmed (Contact Author)

Quaid-i-Azam University - Pakistan Institute of Development Economics (PIDE) ( email )

Quaid-i-Azam University Campus
P.O.Box 1091
Islamabad, Federal Capital 44000
Pakistan

Vaqar Ahmed

Sustainable Development Policy Institute (SDPI) ( email )

38, Old Embassy Road (AttaTurk Avenue)
G-6/3
Islamabad, 44000
Pakistan

Ahsan Abbas

Quaid-i-Azam University - Pakistan Institute of Development Economics (PIDE) ( email )

Quaid-i-Azam University Campus
P.O.Box 1091
Islamabad, Federal Capital 44000
Pakistan

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