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Cointegration Analysis of Indirect Taxes and Fiscal Deficit in Pakistan

Author

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  • Irfan-Ullah
  • Farid Ullah Khan

Abstract

The paper is analyzing the existence of long run relationship between fiscal deficit and indirect taxes in Pakistan for period 1981 to 2010. We used unit root properties of variables followed by Johansen cointegartion and Granger casualty techniques for data estimation. The empirical findings show a possible long run relationship between indirect taxes and fiscal deficits. Indeed univariate causality from fiscal deficit towards indirect taxes also implies that fiscal deficit causes indirect taxes to increases. Both indirect taxes and fiscal deficit have severe implication for economic growth, investment, FDI and consumption decision, therefore government should adopt an optimal tax policy acceptable to both consumer and producer. Indeed, government should minimize the budget deficits or alternative switch towards income taxes and increase its share in total revenues.

Suggested Citation

  • Irfan-Ullah & Farid Ullah Khan, 2014. "Cointegration Analysis of Indirect Taxes and Fiscal Deficit in Pakistan," Journal of Public Policy & Governance, Research Academy of Social Sciences, vol. 1(1), pages 1-6.
    • Handle: RePEc:rss:jnljpg:v1i1p1
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    References listed on IDEAS

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    3. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2004. "Foreign direct investment in a world of multiple taxes," Journal of Public Economics, Elsevier, vol. 88(12), pages 2727-2744, December.
    4. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    5. Tilat Anwar, 2002. "Impact of Globalization and Liberalization on Growth, Employment and Poverty: A Case Study of Pakistan," WIDER Working Paper Series DP2002-17, World Institute for Development Economic Research (UNU-WIDER).
    6. Hansen, B.E., 1990. "A Powerful, Simple Test For Cointegration Using Cochrane- Orcutt," RCER Working Papers 230, University of Rochester - Center for Economic Research (RCER).
    7. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
    8. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    9. Morrisset, Jacques & Pirnia, Neda, 2000. "How tax policy and incentives affect foreign direct investment - a review," Policy Research Working Paper Series 2509, The World Bank.
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    Cited by:

    1. Evangelos C. Papakitsos, 2015. "A Systemic Application of Graph Theory in Issues of Public Administration," International Journal of Management Sciences, Research Academy of Social Sciences, vol. 5(11), pages 716-722.

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