Impact of Economic Determinants of Tax Buoyancy: A Case Study of Pakistan

Abstract

Pakistan has consistently experienced low tax buoyancy, limiting the government's ability to generate revenue in line with economic growth and contributing to persistent fiscal deficits. This study examines the economic determinants of tax buoyancy in Pakistan using annual time-series data covering the period 2001–2024. Specifically, it investigates the effects of manufacturing value added, agricultural value added, services value added, trade openness, broad money, inflation, and official development assistance on total, direct, and indirect tax buoyancy. Data were obtained from the Federal Board of Revenue (FBR) and the World Development Indicators (WDI). The Augmented Dickey–Fuller (ADF) test was employed to examine the stationarity properties of the variables, while the Autoregressive Distributed Lag (ARDL) bounds testing approach was used to estimate both the short-run and long-run relationships. The empirical findings confirm the existence of a long-run relationship among the variables. Broad money significantly and positively affects tax buoyancy, whereas inflation exhibits mixed effects across the estimated models. Official development assistance positively influences direct and indirect tax buoyancy, while trade openness produces mixed results. In contrast, manufacturing, agriculture, and services value added do not have a statistically significant effect on tax buoyancy, indicating structural weaknesses in Pakistan's tax system. The study concludes that macroeconomic conditions play a more important role than sectoral composition in determining tax buoyancy. The findings suggest that strengthening tax administration, broadening the tax base, and implementing structural tax reforms are essential to improve revenue mobilization and promote fiscal sustainability in Pakistan.