A Study of Pakistan’s Fiscal Landscape: Examining the Influence of Institutional Quality and Tax Policy Transformation

Abstract

Tax collection is the fundamental pillar of financing public services such as education, healthcare, social welfare programs, and infrastructure, and ensuring economic stability. A high share in tax to GDP shows showing greater capacity of a government to provide a high living standard. Maintaining a high tax-to-GDP ratio is important to reveal the ability of the government to generate revenue mobilization. The main drive of the paper is to scrutinize the tax reform influence on the tax-to-GDP ratio for the data period covering from 1996 to 2022 in Pakistan. The study employs the ARDL estimation method, which is suggested by the unit root test. Notably, the long-run results show that regulatory quality and government effectiveness depicted a positive influence on the tax to GDP share, suggesting that improvements in these areas can significantly increase revenue collection. Similarly, political stability and the rule of law also play a positive and significant impact on tax to GDP shares, highlighting their vital roles in increasing revenue mobilization and tax voluntary tax compliance. In contrast, inflation appears negative association with tax to GDP ratio, indicating a substantial decline in the revenue mobilization in the total revenue collection. Findings recommend that the government have to focus on enhancing controlling quality, political stability, government efficiency, and the law and order to boost voluntary tax compliance. Additionally, strengthening institutions is vitally important for enforcing tax laws, and guaranteeing a fair and transparent tax mechanism further boosts revenue collection efforts.