The impact of direct and indirect taxation on poverty: The case study of Pakistan

This  research  investigates  the  impact  of  direct  and  indirect  taxes  on  poverty  in  Pakistan, recognizing  poverty  as  a  global  issue  prevalent  across  developed,  developing,  and  underdeveloped nations. Utilizing time series data spanning from the first quarter of 2000 to the fourth quarter of 2021, we  employed  an  Autoregressive  Distributed  Lag  (ARDL)  model  to  assess  short-term  and  long-term relationships  between  poverty  and  various  tax  variables  including  sales  taxes,  custom  taxes,  income taxes,  and  federal  excise  duties.  Additionally,  inflation  and  unemployment  were  incorporated  as control variables in the analysis. By employing Akaike Information Criteria (AIC) to determine variable lags  and  conduct  long-run  bound  tests  to  evaluate  the  significance  of  relationships,  our  findings highlight  a  significant  association  between  poverty  and  sales  taxes,  federal  excise  duties,  and  income taxes. Custom taxes were found to have no significant impact on poverty in thelong run but increased poverty in the short term, while sales taxes and income taxes exhibited short-term effects on poverty. Overall,  indirect  taxes  were  identified  as  contributing  to  increased  poverty  levels  in  the  short  term. These results underscore the importance of understanding the nuanced impacts of taxation policies on poverty  dynamics,  emphasizing  the  role  of  targeted  interventions  in  poverty  alleviation  efforts  in Pakistan.