Pakistan – Optimal Income Tax Structure Using RTPLS Model

This study presents empirical findings indicating that shifting the direct tax burden from consumer’s income to rental and interest income can lead to an increase in gross domestic product (GDP). Employing the Reiterative Truncated Projected Least Squares method, which addresses omitted variable issues and generates reduced-form estimates, the study assesses the effects on GDP of marginal changes in Rental Income Tax, Business Income Tax, Salary Tax, Interest Income Tax, and Transactional Withholding Income Tax from 2000 to 2022. GDP is measured in billions of PKR, while each tax is represented as tax revenuesas a percentage of GDP. The results show that increasing taxes on business income, interest income, and rentals has a positive impact on GDP growth. Among these taxes, the tax on rental income stands out as the most effective in boosting GDP. Conversely, taxes on salary income and transactional withholding income are found to have a less favorable impact on GDP growth, suggesting they are less efficient mechanisms for revenue generation and economic stimulation. Therefore, it is recommended to increase the tax base for rental income and rationalize income taxes on salary.