Estimation of Laffer Curve: Evidence from Pakistan

Abstract

Laffer curve is a tradeoff between tax cuts and tax revenues. The sketch of Laffer curve was drawn by Arther Laffer at a dinner with his friends on his napkin that reduction in taxes will increase tax revenues. Lafer curve explained that lower tax rate could encourage an additional output and it would increase income, which builds bigger tax base in an economy. In this research we have estimated the Laffer curve on the basis of Taxes on goods and services for Pakistan economy for the period of 1990 to 2016. Time series data have been collected from the world economic data base. Results explained that all the variables are significant and signs of coefficients are in accordance with the theory. Results confirm that Laffer curve is alive in Pakistan economy but its existence is in the prohibited area of Laffer curve. It is suggested that plans of taxation should be modified in such a way that maximum number of people could bring under the tax brackets. The taxation structure of the economy should ensure to lower the indirect taxes, encourage the progressive taxes and elasticity of taxation should be increased. The pattern of taxation should be encouraged after introducing some sort of incentives such as relief in the income tax and higher bank deposit rates should be realize.