Does Laffer Curve Exist in Tax Structure of Pakistan? A Threshold Regression Analysis

Authors

  • Khalid Mehmood Adaptive Research Farm, Sargodha, Directorate General Agriculture (Extension and Adaptive Research), Government of Punjab, Pakistan
  • Sajjad Ahmad Department of Economics, University of Sargodha, Punjab, Pakistan
  • Tariq Mehmood Directorate of Agriculture (Economics & Marketing), Government of Punjab, Pakistan
  • Muhammad Mohsin Pakistan Science Foundation, Islamabad, Pakistan
  • Muhammad Ishfaq Directorate of Agriculture Coordination (Farms, Training & Adaptive Research), Punjab, Lahore, Pakistan

DOI:

https://doi.org/10.52223/jei4012217

Keywords:

Laffer curve, Tax rate, Direct tax, Corporate income tax, Threshold regression

Abstract

Laffer curve is a trade-off between tax cuts and tax revenues. The study implies threshold regression to test the existence of the Laffer curve in Pakistan’s economy using time series data for a period of thirty years (1991-2020). The linear association between tax cuts and tax revenues was assessed using simple ordinary least squares technique. The tax structure of Pakistan mainly constitutes two components, direct and indirect taxes. This study examined nature of the Laffer curve using data on direct tax revenue and corporate tax rate. The study supported the evidence of the Laffer curve with a threshold tax rate of 26%. The existing corporate income tax rate in Pakistan is 29% which lies in prohibitive range of the Laffer curve. As a policy measure, the corporate tax rate is recommended to be reduced at least up to the threshold level in order to bring the maximum number of tax evaders and elites under the tax net to enhance the tax revenues of Pakistan.

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Published

2022-04-30

How to Cite

Mehmood, K., Ahmad, S., Mehmood, T., Mohsin, M. and Ishfaq, M. (2022) “Does Laffer Curve Exist in Tax Structure of Pakistan? A Threshold Regression Analysis”, Journal of Economic Impact, 4(1), pp. 145–149. doi: 10.52223/jei4012217.

Issue

Section

Research Articles
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