Economic Development Amidst Income Inequalities and Tax Structure: A Case Study of Pakistan (1976-2011)

Abstract

Foremost objective of every state is to ensure equal distribution of incomes and justice among the general public.  As of a macroeconomic point of view, if the governments want to attain this objective, tax is one of the most significant tools of fiscal policy. This research explores the relationship among growth, inequality and economic development in the perspective of Pakistan. Time series macro data were used and the impact of taxes on income distribution has been investigated for the period 1976-2011 by employing Auto Regressive Distributed Lag (ARDL) econometrics techniques. The index of Gini coefficient was used as an instrument for calculating the income inequality. There are numbers of factors which are responsible for uneven allocation of income in a country, although investment, progressive taxation and growth expenditure on community services play an important function in reducing inequality. This research shows that the share of high income class in GDP is greater as compared to the share of poor class in total manufacture. we may note that this has been as the corporate income raise in developing countries like Pakistan which lead increase in saving and positive impact on the total investment as a outcome its major share goes into the pocket of elite class, so its work in differing direction it lift up income inequality instead of decreasing inequality. The rate at which the income of corporate (elite class) increase is very high than the rate of increase in wages. The results of the estimated model show that there is a long-term equilibrium relationship between independent and dependent variables. The results of the long-term equilibrium relationship show that the coefficient of direct taxes is significant and positive. The outcome also point out a positive correlation between per capita GDP and income inequality

Keywords: Income, Tax, Wage, Inequality, Gini coefficient, GDP