Tax Decentralization and Economic Growth of Pakistan: The Role of Political Institutions

Abstract

Fiscal decentralization is one of the major policy variables to attain economic efficiency. The present study empirical examines the impact of tax decentralization on the economic growth of Pakistan through different institutional arrangements. Further, this study also investigates the complementarity (efficiency) or substitution (inefficiency) phenomena of tax decentralization and political institutions. Time series data is employed from 1972-2020 with relevant methods such as Kwiatkowski-Phillips-Schmidt-Shin (KPSS) and Ng-Perron unit root tests are used and Autoregressive Distributed Lag Approach (ARDL) is also used for co-integration. The results suggest that tax decentralization is growth promoting while political institutions have negative impact on economic growth. Provincial governments can produce better results while transferring responsibility of collecting tax from federal to provincial level. Further, this study also investigates the complementarity (efficiency) or substitution (inefficiency) phenomena of tax decentralization and political institutions. Results show that tax decentralization and political institutions are substitute in case of Pakistan. For policy, the government has taken initiatives to provide more autonomy towards provinces with more resource allocation finally to get long run economic growth.