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Redistributive effect of personal income taxation in Pakistan

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  • Ahmed, Vaqar
  • O'Donoghue, Cathal

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 University Library of Munich, Germany in its series MPRA Paper with number 16700.

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Date of creation: 03 Jul 2009
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Publication status: Published in Pakistan Economic and Social Review 1.47(2009): pp. 1-17
Handle: RePEc:pra:mprapa:16700

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Keywords: Income Taxation; Microsimulation; Redistribution; Inequality;

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  1. Richard Bird & Eric Zolt, 2007. "Tax Policy in Emerging Countries," International Tax Program Papers, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto 0707, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  2. Pfahler, Wilhelm, 1990. "Redistributive Effect of Income Taxation: Decomposing Tax Base and Tax Rates Effects," Bulletin of Economic Research, Wiley Blackwell, Wiley Blackwell, vol. 42(2), pages 121-29, April.
  3. André Decoster & Isabelle Standaert & Christian Valenduc & Guy Van Camp, 2002. "What makes personal income taxes progressive? The case of Belgium," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, ULB -- Universite Libre de Bruxelles, vol. 45(3), pages 91-112.
  4. Richard Bird, 2008. "Tax Challenges Facing Developing Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper0802, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  5. Bird, Richard M. & Zolt, Eric M., 2005. "The limited role of the personal income tax in developing countries," Journal of Asian Economics, Elsevier, Elsevier, vol. 16(6), pages 928-946, December.
  6. Gerhard Wagenhals, 2004. "Tax-benefit microsimulation models for Germany: A Survey," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim, Department of Economics, University of Hohenheim, Germany 235/2004, Department of Economics, University of Hohenheim, Germany.
  7. 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, Pakistan Institute of Development Economics, vol. 40(4), pages 489-502.
  8. 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.
  9. Verbist, Gerlinde, 2004. "Redistributive effect and progressivity of taxes: an international comparison across the EU using EUROMOD," EUROMOD Working Papers EM5/04, EUROMOD at the Institute for Social and Economic Research.
  10. Cathal O'Donoghue, 2001. "Dynamic Microsimulation: A Methodological Survey," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, Department of Economics, Universidade Federal de Pernambuco, vol. 4(2), December.
  11. Immervoll, Herwig & O'Donoghue, Cathal, 2001. "Imputation of gross amounts from net incomes in household surveys: an application using EUROMOD," EUROMOD Working Papers EM1/01, EUROMOD at the Institute for Social and Economic Research.
  12. Klevmarken, N.A., 1997. "Behavioral Modeling in Micro Simulation Models. A Survey," Papers, Uppsala - Working Paper Series 1997-31, Uppsala - Working Paper Series.
  13. Bernardi, Luigi & Fraschini, Angela, 2005. "Tax system and tax reforms in India," POLIS Working Papers, Institute of Public Policy and Public Choice - POLIS 45, Institute of Public Policy and Public Choice - POLIS.
  14. Sicat, Gerardo P & Virmani, Arvind, 1988. "Personal Income Taxes in Developing Countries," World Bank Economic Review, World Bank Group, World Bank Group, vol. 2(1), pages 123-38, January.
  15. 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, Springer, vol. 8(3), pages 299-316, May.
  16. Muhammad Hussain Malik & Najam Us Saqib, 1989. "Tax Incidence by Income Classes in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 28(1), pages 13-26.
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Cited by:
  1. Haque, Nadeem & Ahmed, Vaqar & Shahid, Sana, 2011. "Reforms for competitive markets in Pakistan," MPRA Paper 33990, University Library of Munich, Germany.
  2. Ahmed, Vaqar & Wahab, Mohammad Abdul, 2011. "Foreign assistance and economic growth: evidence from Pakistan 1972 - 2010," MPRA Paper 30344, University Library of Munich, Germany.

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