SAJMS - South Asian Journal of Management Sciences

The Effect of Trade Liberalization on Tax Structure of Pakistan

This study empirically investigates the effect of trade liberalization on tax structure in Pakistan. Autoregressive Distributed Lag approach has been used for examining the cointegration among the variables of the model and Vector Error-Correction method is used for short-run dynamics of the variables. The empirical results show that trade liberalization and trade tax revenue have a negative impact on tax structure in both short and long run. While other control variables, such as budget deficit and external debt servicing is negatively associated with tax structure. The size of the underground economy is used as a proxy for administration capacity, the level of corruption and tax evasion. The empirical results show that the underground economy has also significant negative impact on tax structure. While, real per capita growth, the urban share of population and political stability has a positive impact on tax structure.

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