An Analysis of the Macroeconomic, Structural, and Institutional Factors Affecting Tax Revenue in Pakistan: Evidence from an ARDL Model

Abstract

This paper investigates the key macroeconomic, structural, demographic and institutional determinants of Pakistan's tax-to-GDP ratio. The country continues to be financially constrained despite being relatively under-taxed, thus warrants a closer inspection of the tax determinants for the country. This research is followed time series data over the years from 1990 to 2024 was used in the study. The study employed the popular Autoregressive Distributed Lag (ARDL) bounds testing methodology to test for the presence of a long-run relationship and short-run dynamics among the series. The unit root tests indicate mixed levels of integration among the variables thus validating the use of the cointegration bounds test approach in the context. The study made three models to avoid the multicollinearity issues among variable. This allows the study to understand macroeconomic, structural and institutional factors. From the bounds test, the research found that there is a long-run relationship in all models. In the long run, levels of per capita income, level of democracy, inflation, control of corruption, labor force, male labor force and urbanization and have impacting positively on tax-to-GDP ratio. While the agriculture share in GDP, age dependency ratio and income inequality have negative effects. In the short run, the variables display persistent effects with adjustment to the long run. The diagnostic and stability tests indicate efficiency and stability of the models. The findings imply that strengthening the institutional framework, pursuing structural macroeconomic policy initiatives, and expanding the urban formal sector can help improve the country's tax potential in the long run.

JEL Classification: H20; H26; E62; O23; C22.