https://www.theigc.

org/blog/macroeconomic-benefits-increasing-tax-enforcement-pakistan/

Increasing Tax “Enforcement" in

Pakistan
Arsal Azhar Ali
Ibad Aslam
Maheen Zameer
Dania Khan
 Good and Taxes.

Taxation
• Comprehensive set of legal taxes that firms
are required to pay

• Sales tax

• Excise tax

• Payroll tax liabilities

• Corporate income tax

May 2020
0
MAY 2020

Large scale of
Informal
employment

3 Many businesses are not Burden only on the Low tax revenues which
TAXATION

registered. corporations or people then leads to higher tax

who actually pay taxes rates
MAY 2020
18% in
India

10%
TAX collected from its Gross
Domestic Product on average
28% in
TAXATION

China
 TAXATION
NO ENFORECEMNT

• 36 percent of manufacturing employment is in

the formal sector

MAY 2020
• The remaining two-third are informal firms that
pay few or no taxes each year.
Enforcement and Firm Size

Taxation
• Tax enforcement is strongly related to firm size

• The average formal manufacturing firm pays 8.8 percent of

its value added in taxes

• Smallest formal firms pay around 3 percent, and the biggest

pay more than 15 percent

May 2020
How Entrepreneurs Respond to Higher Tax Rates For

Taxation
Larger Firms

• Try hard not to become larger firms

• Avoid making investments that would raise their

productivity and increase their employment

• Not the incentive the government should be providing to

its firms to stimulate growth

May 2020
The Study: Increased Tax Enforcement

Taxation
• What should the government of Pakistan do instead?

• Firms can make investments that raise their productivity

and size

• This involves becoming formal as well

• trade off between higher productivity of their investments

and higher tax rates they face

May 2020
 Findings

Taxation
• We simulate a cost reduction of operating in the formal
sector (relative to the informal sector) by 10 percent

• Plausible outcome arising from a policy shift to

substantially greater enforcement capacity

• Our simulations predict that GDP per capita would increase

by 1.8 percent

May 2020
 Findings

Taxation
• Government now collects revenues from firms that have shifted
to the formal sector

• Those firms now operate at a larger scale and thus have higher
revenues and profits as part of the tax base

• These forces increase tax revenues by 7.9 percent

• These revenues could additionally raise productivity

May 2020
• Allowing for growth-enhancing investments in infrastructure or
other public investments
 Comparative Analysis

Taxation
• We compare this policy change to an alternative that increases
the tax rate by one percent.

• Higher tax rate increases revenues by 9.2 percent, comparable to

our tax-enforcement

• Increases in tax rates come at the expense of lower GDP growth

• This higher tax rate induces 1 percent of firms to shift from the
formal to the informal sector

May 2020
• Lowers GDP per capita by 0.5 percent (due to the investments
forgone by these firms)
 Conclusion

Taxation
• Increases in tax enforcement capacity may have substantial
growth impacts in the medium run

• Increasing enforcement will induce some small firms to make

productivity-increasing investments

• This will raise GDP per capita directly

• Will also raise revenues, which will likely indirectly increase GDP in
the future due to infrastructure investment

May 2020
• Government should further consider increasing tax enforcement
capacity to increase growth
 TAXATION
Thank you!
Let us know if you have questions or clarifications.

MAY 2020