Taxation and Income Inequality: Empirical Evidence from Pakistan

Abstract

The study's main objective was to probe the empirical interaction among both taxation and income inequality in Pakistan. ADF unit root test, ARDL/ Bound Co-integration test, and Diagnostic Test have been applied to assess time- series from 1979 to 2020. Empirical results indicated that tax revenues (TR) and income taxes (TINCOM) in short run have statistical insignificant influence on GINI, whereas in long run, they have such a statistical significant negative consequence. However, in short and long run, taxes on goods and services (TGS) have statistically noteworthy positive outcome on GINI. The current study conclude based on the results that Tax revenue and direct tax such as personal income tax has a negative statistically significant impacts implying to reduces the income inequality in Pakistan. Moreover the indirect tax such as TGS has positive statistically noteworthy impacts on income inequality in Pakistan implying to increase rate of inequality. Thus, indirect taxes widen the gap between rich and poor in Pakistan.