An Evaluation of Different Tax Reform Proposals in Pakistan using CGE Model

Abstract

Taxes are an important tool of fiscal policy. However, the taxation system of a country also affects its economic growth and the welfare of the people. Since a change in tax policy has far-reaching consequences for various interconnected economic agents, computable general equilibrium model is used to quantify the impact of changes in direct and indirect tax rate policies on various economic indicators. For this, first a social accounting matrix based on 2017 data is also developed. The results show that in the long run under the unbalanced budget condition, reducing personal income tax rates results in increased consumption, government expenditures, and incomes of various types of labour, but decreased economic growth and exports. However, introducing a flat and low-income tax rate along with decreasing corporate tax, sales tax, and customs duties results in higher economic growth, exports, consumption expenditures, and household income. On the other hand, a balanced budget condition produces better economic results.