Impact of Tax Pilferage on Political Economy: A Case of Pakistan

Abstract

Pakistan is a developing country whose main source of revenue is taxes. However, tax non-compliance is on the rise and tax gap of the country stands at around 50%. This leaves the government with meagre resources to fund its responsibilities. This has repercussions for the political economy. The government is not able to provide basic necessities of health and education to its citizens. Similarly, many loss-making PSEs need government support to function, however, due to low revenue collection, the government is unable to funds them. Another issue associate with tax non-compliance is that the evaded money remains into the hands of individuals that causes inflation due to increased circulation of money. Moreover, in order to provide public services and fund its PSEs, the government resorts to borrowing from internal or external sources and have to go through the painful process of repayments that is the foremost responsibility in government expenditures. The study recommends that in order to get rid of the vicious circle, privatization of certain PSEs, control of corrupt practices including tax evasion and effective utilization of loans may be used as tools to mitigate the harmful effects of tax evasion on political economy of Pakistan.