IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v30y2013icp281-294.html
   My bibliography  Save this article

The consequences of revenue gap in Pakistan: Unveiling the reality

Author

Listed:
  • Salar, Laleena
  • Zaman, Khalid
  • Khilji, Bashir Ahmad
  • Khan, Muhammad Mushtaq
  • Lodhi, Mohammad Saeed

Abstract

The purpose of this study is to investigate the major macroeconomic factors that enhance revenue gap for Pakistan through the co-integration and error correction model over a 36-year time period, i.e. between 1975 and 2010. The study employed the bounds testing approach of cointegration to estimate the long-run relationship between the variables, while an error correction model was used to determine the short-run dynamics of the system. The study was limited to a few variables, including economic growth, imports, unemployment rate, external debt and consumer price index, in order to manage robust data analysis. These variables are selected because of their vital importance to an emerging economy like Pakistan. Both short and long-run results confirm that except consumer price index, all other explanatory variables are positively associated with the revenue gap in Pakistan. The results suggest that changes in price level decrease the revenue gap in the short-run which indicates the “Patinkin effect” but these results disappear in the short-run. The results further point out that the speed of adjustment is rather slow for equations to return to their equilibrium level, once it has been shocked. The result of Granger causality test shows that there is a bidirectional causality relationship between revenue gap and imports on one hand, and between revenue gap and underground economy on the other hand. Moreover, unidirectional causality runs from debt, unemployment and inflation towards imports. There is a bidirectional causality runs between debt and imports, between unemployment and imports and between inflation and imports in Pakistan.

Suggested Citation

  • Salar, Laleena & Zaman, Khalid & Khilji, Bashir Ahmad & Khan, Muhammad Mushtaq & Lodhi, Mohammad Saeed, 2013. "The consequences of revenue gap in Pakistan: Unveiling the reality," Economic Modelling, Elsevier, vol. 30(C), pages 281-294.
  • Handle: RePEc:eee:ecmode:v:30:y:2013:i:c:p:281-294
    DOI: 10.1016/j.econmod.2012.09.015
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999312002908
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eliane A. Cardoso, 1998. "Virtual Deficits and the Patinkin Effect," IMF Working Papers 98/41, International Monetary Fund.
    2. Kirchler, Erich & Maciejovsky, Boris & Schneider, Friedrich, 2003. "Everyday representations of tax avoidance, tax evasion, and tax flight: Do legal differences matter?," Journal of Economic Psychology, Elsevier, vol. 24(4), pages 535-553, August.
    3. Kemal, M. Ali, 2007. "Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan: Causes, Consequences, and Linkages with the Formal Economy," MPRA Paper 2226, University Library of Munich, Germany.
    4. Venus Khim-Sen Liew, 2004. "Which Lag Length Selection Criteria Should We Employ?," Economics Bulletin, AccessEcon, vol. 3(33), pages 1-9.
    5. Friedrich G. Schneider, 2006. "Shadow Economies and Corruption all over the World: What do we really know?," Economics working papers 2006-17, Department of Economics, Johannes Kepler University Linz, Austria.
    6. Eliana Cardoso, 1998. "Virtual Deficits and the Patinkin Effect," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 619-646, December.
    7. Bushra Yasmin & Hira Rauf, 2004. "Measuring the Underground Economy and its Impact on the Economy of Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 9(2), pages 93-103, Jul-Dec.
    8. James Alm & Jorge Martinez-Vazquez, 2007. "Tax Morale and Tax Evasion in Latin America," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0704, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    9. Aisha Ghaus Pasha, 2010. "Can Pakistan Get Out of the Low Tax-to-GDP Trap?," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(Special E), pages 171-185, September.
    10. Narayan, Paresh Kumar & Narayan, Seema, 2005. "Estimating income and price elasticities of imports for Fiji in a cointegration framework," Economic Modelling, Elsevier, vol. 22(3), pages 423-438, May.
    11. M. Nagy Eltony, "undated". "The Determinants of Tax Effort in Arab Countries," API-Working Paper Series 0207, Arab Planning Institute - Kuwait, Information Center.
    12. Dhaneshwar Ghura, 1998. "Tax Revenue in Sub-Saharan Africa; Effects of Economic Policies and Corruption," IMF Working Papers 98/135, International Monetary Fund.
    13. Mihir A Desai & Dhammika Dharmapala, 2009. "Corporate Tax Avoidance and Firm Value," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 537-546, August.
    14. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    15. Bajada, Christopher, 1999. "Estimates of the Underground Economy in Australia," The Economic Record, The Economic Society of Australia, vol. 75(231), pages 369-384, December.
    16. James Alm & Jorge Martinez-Vazquez, 2007. "Tax Morale and Tax Evasion in Latin American Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0732, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    17. Hudson John & Williams Colin & Nadin Sara & Orviska Marta, 2012. "Evaluating the Impact of the Informal Economy on Businesses in South East Europe: Some Lessons from the 2009 World Bank Enterprise Survey," South East European Journal of Economics and Business, De Gruyter Open, vol. 7(1), pages 99-110, April.
    18. Baunsgaard, Thomas & Keen, Michael, 2010. "Tax revenue and (or?) trade liberalization," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 563-577, October.
    19. Robina Ather Ahmed & Mark Rider, 2008. "Pakistan’s Tax Gap: Estimates By Tax Calculation and Methodology," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0811, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    20. Alexander Pivovarsky & Benedict J. Clements & Sanjeev Gupta & Erwin H Tiongson, 2003. "Foreign Aid and Revenue Response; Does the Composition of Aid Matter?," IMF Working Papers 03/176, International Monetary Fund.
    21. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
    22. David Giles & Patrick Caragata, 2001. "The learning path of the hidden economy: the tax burden and tax evasion in New Zealand," Applied Economics, Taylor & Francis Journals, vol. 33(14), pages 1857-1867.
    23. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
    24. Bagachwa, M. S. D. & Naho, A., 1995. "Estimating the second economy in Tanzania," World Development, Elsevier, vol. 23(8), pages 1387-1399, August.
    25. Frey, Bruno S. & Weck-Hanneman, Hannelore, 1984. "The hidden economy as an 'unobserved' variable," European Economic Review, Elsevier, vol. 26(1-2), pages 33-53.
    26. Roger Perman, 1991. "Cointegration: An Introduction to the Literature," Journal of Economic Studies, Emerald Group Publishing, vol. 18(3), pages 3-30, September.
    27. B.A. Azhar, 1996. "Tax Pilferage—Causes and Cures," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 35(4), pages 657-667.
    28. Don Patinkin, 1993. "Israel's Stabilization Program of 1985, or Some Simple Truths of Monetary Theory," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 103-128, Spring.
    29. Kusi, N.K., 1998. "Tax Reform and Revenue Productivity in Ghana," Papers 74, African Economic Research Consortium.
    30. Cemile Sancak & Jing Xing & Ricardo Velloso, 2010. "Tax Revenue Response to the Business Cycle," IMF Working Papers 10/71, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. THAMAE Retselisitsoe & NTOI Neo, 2015. "The Existence Of Revenue Gap In South Africa," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 10(2), pages 187-195, August.

    More about this item

    Keywords

    Revenue gap; External debt; Price level; Economic growth; Cointegration; Pakistan;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

    Lists

    This item is featured on the following reading lists or Wikipedia pages:
    1. Recognized plagiarism

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:30:y:2013:i:c:p:281-294. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.