Impact of Taxation and Political Stability on Economic Growth of Pakistan

Abstract

This study investigates the impact of taxation and political stability on economic growth in Pakistan. Analyzing GDP data from 1979 to 2019, measured in US dollars and converted to PKR, we assessed political stability using the Polity IV index and included both direct and indirect taxes in our examination. We formulated two hypotheses: one addressing the impact of political stability on GDP and the other examining the influence of taxation on GDP. A range of methodologies, including unit root tests, ARDL (AutoRegressive Distributed Lag) modeling, and error correction models, was employed to analyze both short-term and long-term effects. Our findings indicate a significant positive relationship between economic growth and both taxation and political stability. Effective direct and indirect taxation policies contribute meaningfully to GDP growth, while a stable political environment is crucial for economic development. To enhance these effects, policymakers should focus on developing progressive taxation strategies and ensuring political stability. This study provides essential insights for policymakers, economists, and government officials to improve tax collection practices and foster an environment conducive to sustainable economic growth.