The Impact of Tax Reform on Economic Growth: Evidence from Pakistan: An ARDL Approach

Abstract

This study investigates the impact of Tax Reform on economic growth by using time series data from 1978 to 2011 for Pakistan economy. Augmented Dickey Fuller (ADF) test is applied to check the stationarity of variables. Tax Reform, Literacy rate, Import, foreign direct investment (FDI) and economic growth variables are considered. Autoregressive Distributive Lag (ARDL) approach to co-integration proposed by Pesaran et al.  (1999, 2001) is employed to find short run and long run relationship among variables. Results indicate that tax reform has negative and significant impact on economic growth both in short run and long run, whereas effect of foreign direct investment on economic growth is positive and significant. Moreover, import has positive and insignificant effect on economic growth in short run, but in long run its effect is negative and significant. Finally, Literacy rate is an insignificant determinant of economic growth. Diagnostic tests confirm that functional form is appropriate, and no serial correlation and heteroscedasticity is found, which highlights the performance of the estimated model. The CUSUM and CUSUMSQ are showing that the model is structurally stable and are lying within the 5% of critical bounds.

Keywords: Economic Growth, Tax Reform, FDI, ARDL, Pakistan.