Assessing the Determinants of Tax Revenue: Empirical Evidence from Pakistan

Raising tax revenue is a critical uestion for non-resource-based revenue-generating economies. There are few studies intending to contemplate the relationship of economic and nancial variables with tax revenue. In Pakistan, this uestion has not been addressed by the researchers previously. This study chooses economic and nancial factors as exogenous variables and tax revenue as an endogenous variable in the case of Pakistan for the period ranging from 1980 to 2019. The study uses ARD ound Testing as it contains the data of the variables that are stationary at the level and rst difference. The study nds that nancial variables in uence tax revenue positively whereas per capita income has an inverse relationship with tax revenue. According to the results of the study, the nancial variables, which include bank capital to total asset ratio, bank non-performing loans, and the bank risk premium on lending, relate positively and the economic variables, which include broad money and foreign development assistance, relate positively except per capita income, which gives results otherwise. The results of the study dictate that increasing reliance on indirect taxation results in a negative relationship between tax revenue and national income because its incidence is on the poor. It suggests that established nancial institutions, inclusive growth, consolidation of the money market, and a progressive tax system could help the economy generate more rewarding revenue generation activity. Indirect taxation creates disparity and regressive taxation, which hampers economic growth therefore, it is suggested ef cient taxation with more portion of direct taxation by the study.