Abstract

The income tax is considered as one of the key source of revenue generation in Pakistan with an approximately 35% contribution to total tax revenue. However, the rates as well as slabs change across different categories of income tax have contributed towards uncertainty and ways for income switching, thus prompting potential behavioral responses. This study analyzes tax returns data of Tax directory (2014-18) of companies, AOPs and individuals. A significant growth in numbers filing has been observed across the analyzed categories without any impressive change in the tax paid. Moreover, the tracing of 400 individuals returns data reports the evidence of slab switching, non-filing and null filing; revealing some probable behavioral responses. In order to identify the optimal personal income tax rates, a time series (1979-2021) analysis was conducted by using OLS estimation technique. The study found out that the optimal tax rates for salaried and non-salaried & AOPs are 31% and 33% respectively. While the average marginal tax rates were 21% and 16%. The study suggest that the contemporary rates are falling in the prohibitive range of Laffer curve. Lastly, a review of various reforms including TARP suggested that the programs have significantly contributed to huge revenue generation while failing to improve the tax-to-GDP ratio.