Abstract
This Paper aims at the dynamic assessment of the size of
underground economy and tax evasion in Pakistan with the help
of time series data ranging from 1966-2010. Using modified
version of monetary approach (modified in the sense that it
involves application of ARDL approach), empirical findings do
confirm presence of underground economic activities and tax
evasion on a higher scale for the under consideration period of
analysis. The underground economy being 43.97 per cent of
GDP in the base year period 1966, observes an increasing trend
till 1980 and then after wards owing to the introduction of
structural reforms in the tax, social security costs and regulatory
frameworks, underground economy witnesses a decreasing
trend and reaches down to 41 per cent of the GDP in 2010. Tax
Evasion following and upward growth reaches to its peak at 8
per cent of the GDP in 1980 and then afterwards, observing a
sharp downfall stands at 3.5 per cent of the GDP in 2010. The
policy-makers should take steps towards documentation of the
economy and while taxing, there should be no sacred cow in the
economy. It is the only way out for the Pakistani economy to
settle the problem of fiscal deficits so that allocations in respect
of development budget may be increased, instead of cutting
down to keep the fiscal position of the country under control.
Omer Farooq. (2017) A dynamic assessment of the size of underground economy and tax evasion in Pakistan, Paradigms , Vol 11, Issue 1.
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