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Redistributive Effect of Personal Income Taxation in Pakistan

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Author Info

  • Vaqar Ahmed
  • Cathal O'Donoghue

    (Department of Economics, National University of Ireland, Galway)

Abstract

This paper studies the redistribution effect of personal income tax in Pakistan. We decompose the overall tax system in order to evaluate the contribution of rate, allowances, deductions, exemptions and credits. The structure given in Income Tax Ordinance 2001 is applied to gross household incomes in 2002 (low growth year) and 2005 (high growth year). Our findings reveal that the reforms laid down in this Ordinance resulted in a greater redistribution of incomes. The redistributive effect increases as we move from 2002 to 2005 tax assessment. Deductions for salaried tax payers contribute the most towards progressivity. This is different from countries with advanced taxation systems relying mainly on allowances followed by tax rate and exemptions.

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Bibliographic Info

Paper provided by National University of Ireland Galway, Department of Economics in its series Working Papers with number 0143.

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Length: 19 pages
Date of creation: 2009
Date of revision: 2009
Handle: RePEc:nig:wpaper:0143

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References

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  1. Muhammad Hussain Malik & Najam Us Saqib, 1989. "Tax Incidence by Income Classes in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 28(1), pages 13-26.
  2. Richard Bird, 2008. "Tax Challenges Facing Developing Countries," Working Papers Series 12, Rotman Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Mar 2008.
  3. Richard Bird & Eric Zolt, 2007. "Tax Policy in Emerging Countries," International Tax Program Papers 0707, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  4. Bernardi, Luigi & Gandullia, Luca & Fumagalli, Laura, 2005. "Tax Systems and Tax Reforms in South and East Asia: Overview of Tax Systems and main policy issues," MPRA Paper 1869, University Library of Munich, Germany.
  5. repec:ese:emodwp:em1-01 is not listed on IDEAS
  6. André Decoster & Isabelle Standaert & Christian Valenduc & Guy Van Camp, 2000. "What makes Personal Income Taxes progressive? The case of Belgium," Public Economics Working Paper Series ces0008, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics.
  7. N. Anders Klevmarken, 1997. "Behavioral Modeling in Micro Simulation Models. A Survey," Working Paper Series 1997:31, Uppsala University, Department of Economics.
  8. Cathal O'Donoghue, 2001. "Dynamic Microsimulation: A Methodological Survey," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 4(2), December.
  9. Adam Wagstaff & Eddy van Doorslaer, 2001. "What Makes the Personal Income Tax Progressive? A Comparative Analysis for Fifteen OECD Countries," International Tax and Public Finance, Springer, vol. 8(3), pages 299-316, May.
  10. M. Ghaffar Chaudhry, 2001. "Theory of Optimal Taxation and Current Tax Policy in Pakistan’s Agriculture," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(4), pages 489-502.
  11. Bernardi, Luigi & Fraschini, Angela, 2005. "Tax system and tax reforms in India," POLIS Working Papers 45, Institute of Public Policy and Public Choice - POLIS.
  12. repec:ese:emodwp:em5-04 is not listed on IDEAS
  13. Sicat, Gerardo P & Virmani, Arvind, 1988. "Personal Income Taxes in Developing Countries," World Bank Economic Review, World Bank Group, vol. 2(1), pages 123-38, January.
  14. Bird, Richard M. & Zolt, Eric M., 2005. "The limited role of the personal income tax in developing countries," Journal of Asian Economics, Elsevier, vol. 16(6), pages 928-946, December.
  15. Pfahler, Wilhelm, 1990. "Redistributive Effect of Income Taxation: Decomposing Tax Base and Tax Rates Effects," Bulletin of Economic Research, Wiley Blackwell, vol. 42(2), pages 121-29, April.
  16. Gerhard Wagenhals, 2004. "Tax-benefit microsimulation models for Germany: A Survey," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 235/2004, Department of Economics, University of Hohenheim, Germany.
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Cited by:
  1. Ahmed, Vaqar & Wahab, Mohammad Abdul, 2011. "Foreign assistance and economic growth: evidence from Pakistan 1972 - 2010," MPRA Paper 30344, University Library of Munich, Germany.
  2. Haque, Nadeem & Ahmed, Vaqar & Shahid, Sana, 2011. "Reforms for competitive markets in Pakistan," MPRA Paper 33990, University Library of Munich, Germany.

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