The impact of direct and indirect taxation on poverty: The case study of Pakistan

Abstract

This research investigates the impact of direct and indirect taxes on poverty in Pakistan, recognizing poverty as a global issue prevalent across developed, developing, and underdeveloped nations. Utilizing time series data spanning from the first quarter of 2000 to the fourth quarter of 2021, we employed an Autoregressive Distributed Lag (ARDL) model to assess short-term and long-term relationships between poverty and various tax variables including sales taxes, custom taxes, income taxes, and federal excise duties. Additionally, inflation and unemployment were incorporated as control variables in the analysis. By employing Akaike Information Criteria (AIC) to determine variable lags and conduct long-run bound tests to evaluate the significance of relationships, our findings highlight a significant association between poverty and sales taxes, federal excise duties, and income taxes. Custom taxes were found to have no significant impact on poverty in the long run but increased poverty in the short term, while sales taxes and income taxes exhibited short-term effects on poverty. Overall, indirect taxes were identified as contributing to increased poverty levels in the short term. These results underscore the importance of understanding the nuanced impacts of taxation policies on poverty dynamics, emphasizing the role of targeted interventions in poverty alleviation efforts in Pakistan.