IMPACT OF TRADE-LIBERALIZATION ON TAX

REVENUE IN PAKISTAN

By

Rubab Habib

Roll No. 46922

(MPhil Scholar)

Supervisor

Madam Shabana Praveen

ECONOMICS DEPARTMENT HAZARA UNIVERSITY

MANSEHRA PAKISTAN 2019

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 TABLE OF CONTENTS
ABSTRACT.........................................................................................................................................5
CHAPTER: No. 1................................................................................................................................6
INTRODUCTION...............................................................................................................................6
1.1 Introduction.............................................................................................................................6
1.2 History of trade and revenue in Pakistan:.............................................................................6
1.3 Objectives:..............................................................................................................................12
1.4 Problem statement:................................................................................................................13
1.5 Organization of the Study:....................................................................................................13
CHAPTER # 2...................................................................................................................................14
LITERATURE REVIEW.................................................................................................................14
2.1 Introduction...........................................................................................................................14
2.2 Theoretical Literature:..........................................................................................................14
2.3 Empirical literature:..............................................................................................................16
2.4 Summary of some major literature:.....................................................................................25
CHAPTER: No. 3..............................................................................................................................28
METHODOLOGY OF THE RESEARCH......................................................................................28
3.1 Introduction:..........................................................................................................................28
3.2 Theoretical Framework:.......................................................................................................28
3.3 Data and Variables:...............................................................................................................28
3.3.1 Explained Variable:...........................................................................................................29
3.3.2 Explanatory Variables:.....................................................................................................29
3.3.3 Data collection:...................................................................................................................29
Table 1: Sources from Where the Data Taken Accordingly......................................................29
3.4 Model......................................................................................................................................29
3.5 Statistical Software................................................................................................................30
3.5 Unit Root Test........................................................................................................................30
3.6 The Auto-regressive Distributed Lag ARDL Model...........................................................30
3.6.1 Lag Selection Criteria........................................................................................................30
3.6.2 Bound Testing....................................................................................................................30
3.6.3 ARDL Long Run................................................................................................................31
3.6.4 ARDL Short Run...............................................................................................................31
3.7 Variables Details:...................................................................................................................31
3.7.1 Tax-revenue........................................................................................................................31
3.7.2 Trade-liberalization...........................................................................................................31
3.7.3 Exchange-rate....................................................................................................................31

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3.7.4 Gross Domestic Product....................................................................................................32
3.7.5 Urban Population...............................................................................................................32
3.7.6 Total Population.................................................................................................................32
3.8 The Mean................................................................................................................................32
3.9 The Median............................................................................................................................32
3.10 Std. Dev and variance........................................................................................................33
3.11 Skewness.............................................................................................................................33
Fig. no. 3.1. Illustration of Different Types of Skewness................................................................33
3.10. Kurtosis..............................................................................................................................34
Fig. no. 3.2. Illustration of Different Shapes of Kurtosis................................................................35
CHAPTER #4....................................................................................................................................36
EMPIRICAL ANALYSIS.................................................................................................................36
4.1 Introduction...........................................................................................................................36
Fig. no. 4.1. Flowchart for empirical analysis:..........................................................................36
4.2. Descriptive-Statistics:............................................................................................................36
Table. No. 4.2. Descriptive Statistical Analysis Table...............................................................37
4.3. Co-relation analysis...............................................................................................................37
Table. No. 4.3. Correlation matrix.............................................................................................38
4.4. ADF Unit Root Test:..............................................................................................................38
Table. No. 4: ADF Test for Stationary........................................................................................38
4.5. Lag Selection Criteria............................................................................................................39
Table. No. 4.5. Optimal Lag Selection Criteria.........................................................................39
4.6 Bounds Testing.......................................................................................................................39
Table. no. 4.6. Bound Test for ARDL........................................................................................40
4.7 Long Run Co-Integration ARDL Model..............................................................................40
Table. No. 4.7. ARDL (Long-run)..............................................................................................41
Dependent variable: TR....................................................................................................................41
4.8. ARDL (Short run)..................................................................................................................41
Table.4.8. ARDL (Short run).......................................................................................................41
4.9. Test for the Diagnosing of Data and Model:........................................................................42
4.9.1. The Serial Co-relation test................................................................................................42
4.9.2. The Heteroscedasticity Test:.............................................................................................42
Table 4.9.2. The Heteroscedasticity..................................................................................................42
CHAPTER: 5.....................................................................................................................................43
CONCLUSION AND POLICY RECOMMENDATION...............................................................43
5.1 Introduction...........................................................................................................................43

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5.2 Conclusions:...........................................................................................................................43
5.3 Policy Recommendations:....................................................................................................43
5.3.3 Solutions.............................................................................................................................44
REFERENCES..................................................................................................................................45

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 ABSTRACT
This study investigates the impact on the tax revenue by trade-liberalization of Pakistan using
time series annual data for the periods of 1980-2017. The dependent variable is the Tax-
revenue while trade-liberalization, total population, real effective exchange rate, GDP, and
urban population are taken as independent variables. Auto-regressive Distributed Lag
(ARDL) method is utilized for short-term and long-term estimation of co-integration.
Augmented Dickey-Fuller (ADF) method is utilized to examine the stationary of the
variables; the findings showed that two variables gross domestic product (GDP) and total
population (POP) are stationarity at level, while other four variables urban population
(UPOP), real effective exchange-rate (REE), trade-liberalization (TY), and tax-revenue (TR)
are stationarity at the first difference and non-stationary at the second difference: the ADF
test leads us to apply ARDL on the selected date. The results described that there is both
long-run and short-run co-integration exists through explained and explanatory variables. The
long-run outcomes showed that trade-liberalization and GDP are a significantly positive
association with tax revenue. While REE, UPOP, and total population have a significant
negative association with tax revenue. It is examined that trade liberalization having a
positive impact on the tax revenue of Pakistan. It is suggested that; government should
improve the tariff rate and decrease tax avoidance chances and in-efficiency in domestic tax
collection in Pakistan that may able Pakistan to defeat the trade-revenue loss with the
development of direct tax collection. The strategy may unbiased prosperity defeat of taxpayer
in the process of future trade-openness.

Keywords: Trade-liberalization, tax-revenue, Pakistan, and ARDL.

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 CHAPTER: No. 1

INTRODUCTION
1.1 Introduction

Trade-liberalization is a complete word that not includes the measure of goods and services.
however, the technical and social concepts and qualities of the entire world. Similarly, it
makes the development of human matter, money, and resources simple through the limits.
The trade development may capital-related profitability and may help speed up currency
development rather than technical (Ahmad and Chaudhary, 2016). The basic idea of trade
openness, such as the absolute advantage of Smith (1776) and the comparative advantage of
Ricardo (1817), depends on the assumption that universal exchange will produce an effective
part of the interest in the trading nation. Samuelson (1949) argues that Smith (1776) believes
that free trade can be increase to mean distribution, work portability, and factoring.

Developing countries face lower tax collection compare to the target amount due to
inefficiencies in the tax collection system (Lutfunnahar2007). Due to some major problems
like political backwardness, poor economic development, undefined taxation policies, and
inappropriate institutional capacity. Pakistan is still not successfully implement an efficient
taxation system. The tax administration system of Pakistan is usually in the hand of corrupt
officers, as during the last ten years all selected governments in Pakistan indulged in
corruption either it is petty (small scale) or grand (large scale) corruption (Chaudhry and
Munir2010). Corruption is an illegal activity committed by people to gain personal benefit. It
weakens the roots on which the progress of any country depends. Like a horrible disease, it
prevails both in private and government institutions. Which ultimately destroys all parts of
the economy. In Pakistan, the roots of corruption showing the period when the British
government rewarded lands and titles to those people who were their loyalists. This was the
starting of nepotism and corruption in the country (Awan and Bakhsh 2004). Pakistan’s
corruption index was 2 in 2010, showing more than 70% of corruption exists in Pakistan. Tax
collection is badly affected by corruption. Due to corruption in the taxation system, 50
percent of revenue remains uncollected (Tanzi and Davoodi 2000). In Pakistan, several
factors like; complications in tax structure and fixed corrupt contracts between the taxpayer
and tax administrator boost corruption. Political instability in Pakistan is one of the main
reasons for lower tax revenues (Ajaz and Ahmad 2010). During the period of political

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instability, neither political authorities think for its public nor do they have any concern about
the development of their country, so ultimately country faces the problem of lower tax
collection. Increasing tax revenue can be achieved if, proper steps would be taken towards
political stability. This is possible if, the total amount of tax revenue shall be diverted away
from corrupt government accounts (Chaudhry and Munir 2010). Removal of trade
restrictions, increasing per capita income, and decreasing inflation are also main factors that
boost tax revenue. Trade openness eliminates quantitative restrictions from goods and
services which ultimately raise tax revenue. An open economy can raise its tax revenue;
because the economy with large international trade is considered as established and well
organized (Imam and Jacobs 2007).

Tax revenue is explained as revenue combined from income and profit taxes, public refuge
aids, goods, and services taxes, worker’s taxes, property ownership, and transport taxes, and
further taxes. The total tax as a percentage of GDP represents the share of country output
collected by the government through taxes. It can be seen as a measure of the extent to which
the government controls economic resources. The tax problem is considered by the total tax
revenue composed as a GDP%; Taxes are divided into two vital kinds, direct and indirect
taxes. Direct taxes are imposed on property, income, and corporate profits. Indirect taxes
contain values including tax, sales tax, and import duties. If direct tax should occur, tax
revenue is determined by the country's strategy, which may relax direct taxes to appeal to
foreign investment or imposes to collect revenue. For example, if the import of raw materials
and machinery should occur, the new foreign enterprise is charged a tax and tax credit and
the import duty is excluded. In addition, indirect tax depends on proposals from goods and
services.

1.2 History of trade and revenue in Pakistan:

In 1947, Pakistan’s economy depends on farming, with only a rare industrial unit. To defend
its early industrial units from international challenges, Pakistan pursues a restrictive trade
policy. Nevertheless, in the late 1950s, Pakistan recognized the measures of free trade in
foreign trade. The method of liberalization was delayed in the late 1960s, as the foreign aids
were shortened after the war with India in 1965, coupled with consecutive a horrible harvest.
In Dec 1971, after East Pakistan (now Bangladesh) ended in eastern Pakistan (now Pakistan),
Pakistan began to change its foreign trade to locate a selective market for trades. Pakistan
once again started to liberalize its foreign trade to find alternative markets for traded items.
During the depreciation of Pak-rupee, removal of the export bonus structure, also removal of

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restraining certifying were the main strategies. In any case, in the late 1970s, when oil prices
were shocked, imports are controlled due to limited foreign trade savings. In the mid-1980s,
the government began a moderate and conscious trade-liberalization process. In January
1982, the shift from fixed to a managed floating Exchange-rate system and the removal of
fixed parity of the rupee from the US dollar were by far the most significant procedures
undertaken by the government to inspire exports. To increase imports, most of the taxation
rates have been cut, the tariff rate has decreased. All products have constant sales tax.

In the mid-1980s, the government, IMF, and the WDI agreed to begin a complete trade
liberalization program. The important periods contain decreasing tariffs. Exclusion of banned
records, and the change of the Industrial Incentive Reform Group to the tariff Committee. In
addition, Pakistan continues to adopt a flexible exchange-rate approach, which reduces anti-
export bias. To increase the export, some different measures have been tried, including
removal of export duties, refund of sales tax, duty drawback arrangement, export credit
guarantee scheme, and export finance arrangements. Due to trade reform, Pakistan has
largely completed the neutral trade system of the 1990s. In the 21st century, Pakistan adopted
a trade-liberalization approach. For this reason, the government is following the tariff
explanation method, which depends on the model of insignificant tax rates and non-taxation
boundaries, and the market-based exchange-rate system, which is in line with the industrial
strategic goals.

Trade-liberalization has a dual influence on trade revenue for different economies, areas, and
different data sets. Trade revenue harms trade openness by the decrease in tariff rate. In some
cases, trade liberalization has a positive impact on trade revenue due to a rise in the volume
of imports and vice versa this effect is demonstrated through the “Trade Laffer Curve” which
explains the connection between tariff rates and trade revenue. When the tariff rate increases,
it decreases the trade-tax revenue due to a decrease in imports volume. On the contrary, the
lower tariff rate may also reduce the tax revenue from trade openness. When any country has
already relatively liberalized, additional discounts in tariff rate will not be the source of any
addition in trade revenue.

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Trade-liberalization may be described as a series of measures, including dealing with
government mutilation, removing import quotas, reducing import taxes, trade existing records
for convertible currencies, eliminating bureaucratic forms, and different barriers to remote
direct risks, and improving traditional strategies (Rodrick, 2006). The result of the trade
liberalization leads to specialization, advancement of industrialization: mechanical trade,
expansion of competition, and improvement of expectations in the living standard of the
population (Cruz, 2008).

Economist has distinct debates approximately the impact of trade-openness on trade tax
revenue. Therefore, the link between trade-tax-revenue and trade-openness is doubtful. The
greater tariff motivates importers in releases and may therefore impact the efficiency of the
tax system. Decrease tax rates in certain regions have become a reason for increasing the
basis for taxes by maintaining a strategic distance from the tax system by lowering the
marginal advantage, and then liberalization suggests an increase in income (Prithett and Sethi
(1994). So this is usually not due to promotion. The reduced situation has led to a decrease in
revenue.

Youthin and Aizenman (2006) presented the assumption that trade-openness has the latest
financial tasks, mainly for developing countries because they have a low level of tax revenue
to GDP share. Due to trade-liberalization, developed countries can shift the loss of trade-tax
revenues to further types of domestic taxes because they have a high level of institutional
quality and production organization status. In any case, due to the developing country, they
face two problems, such as the quality of low-tax institutions and the low ratio of tax to GDP.
In this way, these economies are not able to change the tax burden to domestic indirect
taxation.

The trade-liberalization over the world in the last years has been focused on its several
profits. The most significant advantage of free trade has prompted most countries to walk
through the free trade system, and an open trade approach has led to better economic
performance. The possible increase of trade has been raised by early classic scholars David
Ricardo and Elekech Sher. They suggested that due to international trade, these increases
were the result of specialization. If a country specializes according to its comparative
advantages, it can improve the designation of domestic resources. This achievement has
increased efficiency of production, as resources used to generate different goods over time
have now moved to the production of the best products in the country. As a result, the

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compensation and benefits of all trading complicity will be improved. Although the economy
has developed over time due to the increase in profitable assets and improvement;
furthermost, the economic literature recommends that trade-liberalization can improve the
distribution of domestic assets, thereby promoting the expansion of economic welfare.
According to Dornbusch (1992), Salehezadeh and Henneberry (2002), and Dennis (2006),
each import restriction increases the cost of import goods relative to export goods.

Trade-liberalization involves without government limitation and open transaction of goods &
services, capital and labor flexibility across nations. “Trade-liberalization linking developed
and less developed countries, may reduce absorbing and so the growth of general knowledge
in developing countries. Trade-liberalization can promote specialization in product lines,
which has not had very much discovering in developing countries” (Young, 1991).

Tax reform is often an essential part of trade openness. The key objective of tax reform in
trade openness is to confirm that the tax scheme is sufficient to moderate financial
irregularities. In general, countries that have left on the way to liberalization have also made
changes to household fees during this period to modernize their tax frameworks, expecting
shifts in costs to reduce consistency and accumulate costs, and improve tax organizations to
increase revenue. through this way when the tax design and organizational change within the
time frame of openness, the performance of the tax revenue can be investigated.

In addition to the advantages, some costs are also related to trade openness. An important
issue in reducing trade barriers to trade is the unfortunate tax revenue, which accounts for 10-
20% of the revenue generated by the national government [Z. Yasmin b. Jhan, Ch A.M.
(2003)]. If a tariff is condensed or removed, these countries should be forced to increase
different taxes to maintain their budget limits, resulting in some financial distortion.

Trade reforms are critical to financial development and poverty reduction; national
policymakers have reduced tariffs and reduced non-tariff boundaries, and the focus of the
debate is that when taxes are high or limited, items may not be invoiced, smuggled, or not
imported. (Amponsah, 2002). When the tariffs are reduced to a reasonable tax rate, the item
must enter a country through a formal method and assume obligations. Whether the normal
tax rate is low or not, this can be established through a large amount of revenue. In addition,
when taxes are reduced and import costs are reduced, interest on imports may increase. In

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any case, in short-term circumstances, the volume of imports and these tax revenues may
depend on the elasticities of demand, increase.

According to Tanzi (1989), tax revenue as a share of GDP remains low in most developing
countries. The contribution of regressive taxes is low as compared to progressive taxes due to
three reasons:(i) Complete absence of agricultural income tax, (ii) High exemption limits as
compared to levels of per capita income, and (iii) Widespread tax evasion. In Pakistan, a high
share of total tax collection is produced through regressive taxes. Import duties produce more
than 40 percent of total government revenue. A decline in tariff rate is likely to diminish the
proportion of total public revenue. This may increase the burden on the government in the
form of a budget deficit. However, to some extent, the government can overcome the gap
through tax reforms i.e. value-added tax. For example, reduction in import duty must be
accompanied by the restriction and proper monitoring of the Afghan Transit Trade. More
imports and exports should come in trade volume through the legal channel, which generates
high trade revenue for the government. Furthermore, the government can enhance the
revenue share by introducing value-added tax (VAT), wide-based sales tax, and agriculture
income tax.

There are a large number of components that can affect global trade tax revenues. Such as the
level of trade liberalization, the variety produced by the external exchange rate, the behavior
required for imports, the auxiliary changes in the economy, the level of progress, and the
domestic tax structure. In Pakistan, tax revenue was managing the ATR. Centralized
Administration implements many taxes to raise both taxes in the way of income collection.
Trade-Openness in Pakistan might be categorized into export increases and import exchange.
To advance the exchange, Pakistan's administration removes measurable boundaries,
controlling duties. In 1995, most taxes have been reduced to 25% from 80% (Khan, 1995).

Trade-liberalization may produce economic uncertainty for unindustrialized countries

because in total tax collection was the high share of trade tax revenue. GDP as a share of
domestic tax revenue is mostly down in emerging countries because of simple tax
organization, more unofficial segment, insignificant agrarian revenue tax, maximum
exceptions or tariff breaks, and extensive tax avoidance (Gupta, 2007).

There are several features to impact the global trade openness on revenue tax, following
changes in the foreign Exchange-rate, the behavior for required imports, the organizational
differences of the economy, level of advancement, and the main thing is the domestic tax

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system. Kubota (2005) observed that the economic wants are not taken with domestic
requirements. The administration has a propensity to move tax collection towards an easy
form, due to the simple government structure of the tax collection method.

The trade-liberalization was a recent fiscal task, mostly in emerging nations, and the GDP
ratio was where the small level of excise income was. Appropriately trade openness,
established nations can change exchanges to other types of households to assess income
misfortunes because they have a high level of established value and information
management. Despite this, they face similar difficulties in developing countries, and the most
unstable association incentives have little responsibility for setting obligations and for the
country's total output range. Therefore, these countries are not capable to change the tax rate
to domestic secondary tax selection (Aizenman and youthin, 2006).

In the Pakistan case study, the actual quotation of total revenue was generated through
indirect taxes during the period of 1990s. Import obligations or trade-tax account for 40% of
total government revenues. After the structural reform, the percentage of tax to GDP began to
decline, contributing to only 15% of the total revenue of the Pakistani government (Zaidi,
2005). Further reductions in tax rates are intended to reduce the income of residential
assessments provided further. In the long term, it may raise the fiscal structure, just like the
increased budget deficit. Under the imperfect market condition, the government is deciding to
defeat revenue loss by adapting to changes in the domestic tax structure.

The developing countries show a positive relationship between external debt and the trade-
liberalization policy. Trade taxes are the vital cause of producing revenues for the developing
countries, especially for the poorest ones, increasing trade-liberalization wants the reduction
or removal of imports and export tariffs, and the finding fiscal inequality at that time has to
be complete with increased borrow (A.Caliari, 2005).

At the global level, different analyses (Warwick and Alexander (2007), Sarkar (2005),
Hassler (2004), Marhubi (2000), and Tanaka (2007) presented the positive relationship
between trade openness, trade-liberalization, and economic growth. Alves and Edwards
(2006) found a positive impact of trade openness on South African export development.
Exporters accept trade and positive financial status. (Mwaba 2000) concluded that the trade-
liberalization strategies increased the export of African countries. Export enforcement
requires export expansion in Algeria, Tunisia, and Morocco, product advancement, and
quality improvement (Mouna and Reza, 2001).

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In the last two decades, Pakistan has been working hard to change its trade regime. The most
extreme tax rate fell from 225% in 1990-91 to 45% in 1996-97. In the 2007-08 fiscal years, it
was also reduced to the most extreme tax rate of 25% (although there is the automobile
sector). The average tax rate for the 2007-08 financial years is only 6%, related to 65% in
1990-91. During the same period, the number of taxes was reduced from 13 to 4. In addition
to those religious and social issues that identify with security and health, measurable import
limitations have been excluded. In June 2004, the number of statutory requirements for
exempting certain companies; from import obligations was lifted: 4,000 import obligations
were reduced: Import promotion measures for agriculture and petroleum commodities
received.

Previously analyses of Pakistan comprising Fatima (2010), Qamar (2008), Arshad and
Qayyum (2007) concentrated to determine the effect of trade liberalization on growth in
Pakistan then impact of tax factors is exceptional in Pakistan. The study is appropriately
considered to conclude the impact on the tax revenue by trade-liberalization in Pakistan.

1.3 Objectives:
In the research some objectives are as follows:

i) To examine the impact on tax-revenue by trade-liberalization in Pakistan.

ii) To estimate the impact of Exchange-rate to tax-revenue.

iii) To find the evidence for existence of trade-liberalization in Pakistan.

1.4 Problem statement:

Each economy having more emphasis upon the collection of revenue for the fulfilment of
their domestic needs and other concerns. Numerous studies have been done which was
focusing on the evaluation of factors affecting tax collection in Pakistan. In this study
researcher especially taken trade liberalization as a factor affecting the tax collection in
Pakistan. For such purpose, a number of factors were included in the model which is
affecting tax collection, and check the impact of those factors as well.

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1.5 Organization of the Study:

The research has been established as follows in 5 chapters. Chapter 1 includes the
introduction, objective of the study, Problem statement, and organization of the study.
Chapter 2 was the review of literature from the previous studies and which showed the
impact of trade-liberalization and tax revenue, chapter 3 was discuss the methodology of the
research data sources and model specification, chapter 4 was discuss the findings of different
tests showed by the study over the related era of a period, while chapter 5 is based on
conclusion with policy recommendations.

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 CHAPTER # 2

LITERATURE REVIEW
2.1 Introduction
There is vast literature on impact on tax-revenue by trade-liberalization. The chapter involves
brief review of theoretical literature, and then empirical review of the earlier study and in the
last of the chapter of study has discussed the summary of the whole literature.

2.2 Theoretical Literature:

Theoretical literature has established: three approaches to explore the effect of trade
liberalization on the trade balance of an economy namely, the elasticity approach, the
absorption approach, and the monetary approach. The flexible approach is largely concerned
with investigating the impact of trade liberalization on the diversity of export and import
values. Nonetheless, this approach includes different parts of trade-liberalization, which do
not include value changes. As shown by the absorption method, the impact of trade-
liberalization will depend on how the real income retained is affected. Finally, in terms of
monetary policy, the outcome of trade-liberalization depends on how real demand for money
changes in real supply. Previously, the so-called "intertemporal method" was also used to
analyze the impact of trade-liberalization arrangements on exchange rate balance. This
approach examines the intertemporal effects of export and import taxes on short-term and
permanent changes in the trade balance. The main problem with the intertemporal model is
that it is extremely sensitive to the basic hypothesis.

Gaalya (2015) established that trade revenue has endogenous effects on fiscal composition
and structure. Most of the studies conclude that trade-revenue has an opposing impact on tax-
revenue in those countries which have fewer capabilities to change the domestic tax structure.

Castro and Camarillo (2014) examined the impact of trade-liberalization on the domestic
structure of taxes on OECD countries. The analysis applied different methods of trade-
liberalization and the consequence got that physical capital, FDI, and agricultural growth
have a negative correlation with tax-revenue, On the other hand public liberalities, industrial
growth and GDP per capita have a positive correlation with tax-revenues,

15
Velaj and Prendi (2014) explored the relationship between tax-revenue collection and other
variables including per capita GDP, unemployment rate, inflation rate and imports of goods
and services based on data from 2001 to 2013 in case of Albania. The results show that the
expansion rate, import of goods and enterprises, GDP per capita are closely related to the tax-
revenue collection. Unemployment rate has had an opposing impact on tax-revenue
collection.

Mahdavi (2008) used the advancement estimation method to provide uneven board
information to 43 District Councils during the period 1973-2002 (including Pakistan). His
results showed that the guide has had a negative impact; non-tax revenues have an additional
negative impact, while the agri-business sector provides positive but not important factors.
The trade area quotes have constructive results, and the female variables of currency
dynamics have a net adverse but insignificant impact, while the mature part of the population
shows a negative relationship between payment and transaction costs. Both urbanization and
education rates showed positive results. Population density, monetization and inflation rate
remained negatively correlated. The reciprocal of per capita GDP was clearly related to the
extent of taxation. The net impact of political rights and common freedom was significant.

Davoodi and Grigorian (2007) verified the relationship among tax-revenue and various tax
determinants which are in line with the previous studies for a group of 141 countries for the
years 1990-2004. The coefficients of institutional quality, GDP per capita, urbanization,
trade-liberalization and GDP on share of agriculture are found to be positively linked.
Inflation and impact of shadow economy are negatively regressed with tax GDP ratio.

Gupta (2007) examine the causes of tax efforts to developing economies using fundamental
factors such as organizational, political security, and low dimensions. He also stated that such
components have a direct and significant role in developing the monetary position of the
economy.

Naito (2006) examined the dynamics of tariff and tax reforms under revenue neutrality
restraint. In the study established a policy that tax-revenue is not unbiased in those economies
which have further share of capital goods rather than consumer goods in their total imports
objects.

Emran (2005) recognized another database to arise revenue from the tax of a specific thing.
For the reason that, creation of these things helps to pay off for the unfortunate income from

16
trade-liberalization in the hypothesis of stable manufacturer costs. Below these situations,
trade-liberalization may be suitable for domestic tax accumulation. Mainly the program was
gradually adapted to the countries created because they have more imports.

Kenen (1985) presents a static model, which puts together the elasticity and absorption
approaches to measure Marshal Lerner (ML) condition. Marshal Lerner condition implies
that the countries having addition of price elasticities of import and export greater than one
will have the more tax-revenue from trade. But price elasticity of import demand have not the
sole determinant of trade revenue.

2.3 Empirical literature:

Ahmed and Ali (2018) examined trade-revenue implication of trade-liberalization for
Pakistan. The Laffer curve method is used to realize indirect connection between trade-
liberalization and tax-revenue. Empirically outcomes have shown that trade-liberalization has
an important effect on direct exchange of revenue. The indirect relationship was also studied
under the influence of other macroeconomic variables. The small impact of trade openness in
the non-liner era has a negative impact on trade tax-revenue. In long run, experimental tests
show that there is a modified U-shaped behavior between Pakistan's trade-liberalization and
trade tax-revenue, but this behavior does not exist in the short term.

Shubati and Warrad (2018) studied the impact of global trade-liberalization on the income of
governments in the Middle East and North Africa (MENA) for the period of 2000 and 2015.
More specifically, this study looks at the relationship between government revenues and
universal trade-liberalization, real per capita gross domestic product (GDP), pollution levels,
and population. For the nine selected Middle East and North African countries, the survey
used panel data cover the period 2000-2015. The conclusions of the survey, using the least-
squares method fully adjusted by the panel of directors, have the negative impact of global
trade-liberalization on government revenue. In addition, the results show that countries with
higher real GDP per capita GDP and lower exploitation levels have higher government
revenues, while the entire population bears negative works in government revenues.

Kimm (2017) studied the influence of domestic trade-liberalization on government revenue it

is important to observe the progress of multilateral trade policy for government revenue.
Investigated used the dataset of the panel of managements covering 169 countries for time
periods of 1995 to 2013 to demonstrate that the progress of the multilateral trade openness
does have a progressive impact on government revenue. On the other hand, this effect gives a

17
need for a dimension of improvement between the both countries and the dimensions of
domestic trade strategy openness development. This result has the significance of the World
Trade Organization’s individual promotion of multilateral trade openness. In addition, the
prohibitive domestic trade method that may demoralize multilateralization efforts will
ultimately undermine the positive impact of the multilateral trade process on government
revenues.

Asghar and Mehmood (2017) investigated the link among the trade openness and tax-revenue
collection along with other non-tax determinants affecting the tax-revenue of Pakistan, by
using time series data for the years 1980 to 2015. The analysis used bound test approach
(ARDL) to estimate co-integration. The results showed that trade openness are opposite
linked with tax-revenue performance. If the trade-liberalization is followed by decrease in
tariff, so there may be a condition of decrease in tax-revenue then the outcome of trade-
liberalization may be changed. For strategy suggestion, the study suggests that government
should give proper emphasis on the repairing of the whole tax system for internal tax-revenue
mobilization in the situation of uncertainty in foreign aid and taking of worldwide policy of
free trade. More, it should develop the property tax-revenue collection in urban areas and also
renovation the system of capital value tax on the fixed property relations.

Gnangnon (2017) showed in view of the panel data of 169 countries, 37 of which were the
least established countries during the period 1995-2013, trade-liberalization had a positive
impact on income. The exams show that the positive work of the trade openness depends on
the dimensions of national progress and the dimensions of the local exchange process. The
general arguments show that the restrictions on the exchange method weaken the positive
impact of trade-liberalization on government revenue, thereby weakening the tax-revenue. In
addition, the higher level of real GDP estimates has increased the positive impact on tax-
revenue by trade-liberalization s, mainly in the long term.

Ahmad and chaudhary (2016) analyzed the effect of trade-liberalization on tax structure in
Pakistan. Short run dynamics of the variables were used Autoregressive Distributed Lag
(ARDL) methods which were used for studying the co-integration with the variables of the
model and VECM. The finding suggests that trade-liberalization; trade tax-revenue and
underground economy were used as proxy for administrative capacity which negative impact
in both short and long run on tax structure. However, further factors alike budget deficit and
external debt development are adversely related with tax structure and real per capita growth

18
whereas built-up part of residents and administrative constancy have a positive impact on tax
structure.

Cage and Gadenne (2016) analyzed the relationship between tax-revenue collection and
trade-liberalization with its impact on trade tax-revenue for a group of 130 developed and
developing countries of the world for the period 1792 - 2006. The results showed that trade-
liberalization was more severe impacts on developing countries as linked to establish nations
of the world and these are longer lived in the former.

Shahbaz et al. (2016) studied the impact of trade-liberalization on taxation and consumer
prices in the case of Pakistan. The study analyzed variable data before and after trade-
liberalization, including imports, exports, taxes, and consumer prices. The finding shows that
the negative impact on these variables is not only the cause of trade openness, but also the
internal problems of other countries. Problems include the energy crisis that severely affects a
country's total output, political instability and lack of internal security, thereby reducing FDI.

Karimi et al. (2016) analyzed the impact of trade-liberalization on tax structure in a panel 97
developing countries for the period 1993-2012. Our empirical outcomes, based on the fixed-
effect estimator, reveal that as trade openness does not seem to have a strong impact on the
real assessment wells of the rising country. On the contrary, the trade openness as a tax cut
seems to promise to tax structures in these countries.

Micah (2015) examined the time series data used to covering the period from 1994-2012 to
derive relevant results. His research uses permanent and unsystematic results to found factors
of tax performance. They report that tax-revenue performance was positively affected by
trade-liberalization, industry-to-GDP ratio and Exchange-rate. Foreign aid and the share of
agriculture in GDP have had a negative impact on tax performance. Similarly, the impact on
agriculture's contribution to GDP and aid received from foreign is also significant. An
important finding of this study is that trade-liberalization represented by trade openness has
increased tax-revenues.

Sokolovska (2015) explores the relationship between trade freedom index and trade tax-
revenue. Data on 104 countries for the year 2012 was used in the study. For more study,
splitting the country into two assemblies depends on the wage levels set by the World Bank
organization. The result showed that there is a significant negative relationship between the

19
trading of low-paid and low-Centre-income economies and the revenue of trade tax, which
allows us to determine monetary policy at different stages of trade-liberalization.

Jafri et al. (2015) studied that the relationship between trade-liberalization and tax-revenue
collection in Pakistan for the period 1982 to 2013. The results expose that trade-liberalization
has been positively related with tax-revenue collection.

Baunsgaard and Michael (2010) established that trade revenue has endogenous effects on
fiscal composition and structure. Most of the studies conclude that trade-revenue has an
opposing impact on tax-revenue in those countries which have fewer capabilities to change
the domestic tax structure.

Zakaria (2014) examined the effect of trade-liberalization on exports, imports and trade
balance in Pakistan for the period 1981 to 2008. The other variables used were RER, internal
and external incomes, terms of trade and external exchange market. The time series data was
used in the study. The result showed that trade-liberalization motivates both taxes with the
consequence more on later than on earlier thus reducing the trade balance and also finding
significant plan inferences for measure of trade openness in Pakistan.

Epaphra (2014) observed and analyzed how trade-liberalization affects Tanzania's import
duty income and domestic tax rate conditions? The observations show that GDP, exchange
income is significantly related to the tax rate. This shows that the trade openness has
produced impressive import duty revenue in Tanzania.

Karagoz (2013) established an econometric model from 1970 to 2010 based on Turkey.
According to the survey, the provision of GDP to agriculture has a negative correlation with
the tax-revenue. Trade-liberalization has no significant impact on Turkey’s revenue. The
foreign debt GDP ratio, the provision of modern output in GDP and urbanization are closely
related to the tax-revenue.

Mushtaq et al. (2012) estimated impact on tax-revenue by trade-liberalization in Pakistan for

period 1975 to 2010. The study used times series data and econometric techniques were used
to estimate the impact of many aspects on trade taxes and tax-revenues. The tax-revenue
found that significant and negative results in Exchange-rate and population. Whereas, trade-
liberalization, trade share, GDP and urbanization were significant and positive result in
relationship on tax-revenue. Therefore, financial and economic strategies must be planned to
develop the accessible ability in the period of trade openness.

20
Hisali (2012) studied the trade revenue conduct for Uganda to used time series data. The
results support the negative impact of Exchange-rate on custom revenue. Higher subsidy
costs may result in a reduction in trading volume, just like long-term exchange of income.
Spearot (2013) explores the link between exchange income and import demand, import costs
and diversity of import demand. The results of the experiment show that less flexible imports
can bring more exchange income than the increasingly diversified import benefits of the
trade-liberalization.

Batuo and Asongu (2012) used the panel data of 26 African countries disseminated during the
period 1996-2010 to analyzed the impact of trade-liberalization, with certain attention to the
impact of monetary, exchange, institutional, political and financial advances on income-
inequality. They link the two technologies, the dynamic panel econometric strategy and the
"previous, then after the fact" approach. In most cases, their results usually suggest that, in
general, changes in the trade freedom will increase the income-inequality in African
countries. Crechet (2012) conducted an accurate survey of 45 founding and developing
countries from the period 1990 to 1997 and regressed synthetic indexes of inequality on
trade, in interaction with a measure of financial development. He concluded that the trade
freedom will expand the income inequality in some of the countries created.

Liberati and Antonio (2011) examined the impact of economic integration on the vertical
public structure at the country level. In some situations, the total tax-revenue over GDP
decreased when the volume of trade openness increased. It could situate changed results on
the country’s straight structure of open segments management. Trade openness may origin to
decrease the whole management tax over GDP and total public expenditure. It can be
increase the economic integration resident tax-revenue mainly in those economies which are
adversely connected to fundamental tax-revenue and it may also rises the degree of
devolution in the country.

Antonio and Garcimartin (2011) studied the linked between tax income and the different
determinants of the emerging and developed nations from 1990- 2007. Based on an accurate
investigation, there is a positive and critical relationship between the estimated income and
per capita of GDP, and the exchange is willing to accept. Although the GDP and expansion
provided by agriculture indicate a key but positive correlation with the tax GDP ratio, the
normal results are contradicted. Income distributions are the most notable variables affecting
the tax-revenue.

21
Anwar et al. (2010) studied the impact of trade-liberalization on Pakistan's cotton price rise
between 1971 and 2008. The impact of changes in trade arrangements has been analyzed by
aggressiveness, concentration of exports and liberalization in agriculture trade. Quantitative
tests of the survey indicate that domestic and international trade arrangements have a
significant impact on the rise in cotton prices. The world’s interest in cotton has clearly
affected the price of cotton. The strength and increment of trade-liberalization increases the
exports for cotton. Competitiveness (LCM) shows the highest level of cotton price increases.

Pessino and Fenochietto (2010) studied an empirical survey of 96 countries gathered during
the period 1991-2006 to determine the link between their tax-revenues and other autonomy
factors. The study maintains past results through a positive and huge relationship between
tax-revenue and per capita GDP, trade-liberalization and education levels. Variables such as
inflation, wage distribution and depreciation documents are negatively correlated with tax-to-
GDP ratio.

Keen (2008) studied the issue relating to the trade revenue working as neutral against internal
sources. He studied the information for huge countries and resolute that the low-income
nations are not capable to recover the income shortage from trade openness through internal
taxes. Low-wage countries have just recovered 30 cents instead of $1 from exchange
earnings. As a central salary country, they increased by 65 cents instead of $1. However, in
the instance of high-paying countries, they were able to recover the square through the
income that contrasted with $1.

Aliyu (2007) empirically proved the factors of import and export demand behaviors for
Nigerian economy. He added that wages have a small impact on imports and tariffs, while
past wage levels have a significant impact on export requirements. If this is the case in
Pakistan, the cost of imported products will decrease and become diversified as wages
increase. It concludes that the expansion of the cost rate will leads to an increase in exchange
income through trade-liberalization.

Dutta and Ahmad (2006) empirical investigate the relationship between trade-liberalization
and industrial growth in Pakistan. In this study, they have been used 2 techniques for study,
the co-integration analysis and ECM. There is a long-term relationship between the overall
development work including mechanical value and the real determinants of real capital stock,
work rights, real exports, import tax rates and auxiliary enrolment ratios.

22
Zafar (2005) investigated the income and monetary effects of the trade openness in Niger
from 1983 to 2003 and found that in the 1990s, structural adjustment and tax reductions in
West African regional coordination activities had a negative impact on exchange assessment
income. In any case, it found that the increase in imports after 1994 the exchange of progress
generally balanced the adversity of income.

Kowalski (2005) explored the relationship between trade-liberalization and income in 12

countries and suggested that, in general, a reasonable exchange income decline was
moderately reduced in liberalization. The trade-liberalization has providing the greatest focus
to those economies that are increasingly skilled in financial conditions. Although it is difficult
to reduce the tax rate by another financial change, the reason is that most of the developing
countries know about the open market.

Ahsan and Wu (2005) identified the tax determinants affecting the tax-revenue for a group of
developed and developing countries for the period 1979-2002. Variables like agriculture GDP
ratio, GDP per capita and population growth were negatively linked with tax GDP ratio
whereas, trade openness was significant but positive relation with tax GDP ratio.

Agbeyegbe et al. (2004) examined the relationship between trade-liberalization, exchange-

rates, and tax-revenue in sub-Saharan for the time 1980–1996. The study used to check this
relationship in GMM regressions. The verification that the connection among trade-
liberalization and tax-revenue is sympathetic to the amount, but in overall, total tax-revenue
or its elements though with single quantity is not strongly related to trade openness, it was
related to higher income tax-revenue. Lower tax-revenue shows some relation to currency
increase and higher inflation. These results showed that some incomplete uniformity and
assist the views that trade-liberalization go with by rational macroeconomic strategies may be
accepted, thereby saving general income.

Bilquees (2004) used the DIM (Divisia index method) to estimate the flexibility and diversity
of Pakistan tax-revenue from 1974 to 2003 and examined the main content of the subsequent
elastic coefficient. Her assessment of flexibility suggests that tax-revenue did not change to
huge expansion. In any case, the high sale rate factor for the gross domestic product base
reflects the integration of the service sector and utilities in the sales tax Network, which has a
real impact on the poor.

23
Teera (2003) investigated the linkage between tax-revenue and several other variables on the
basis of data for Uganda for 1970-2000. The study used panel estimates taking collective
time series and cross-section data. The results conclude that tax-revenue, agriculture GDP
ratio, and population density negatively influence the tax-revenue collection. Surprisingly,
per capita GDP also bears a negative sign. Whereas, trade openness evidences a negative sign
but foreign aid documents a progressive relationship with GDP tax ratio.

Peter (2002) explores the impact of trade-liberalization on trade rate gains in small open
economies. He set up that the reduction in the tax ratio of the developing country had an
unrestrained result for the trade of income. He asserts that trade income usually depends on a
number of components, such as taxation strategies, promotion dimensions, and import
flexibility levels of alternatives. Finally, the study concluded that due to above factors, the
trade tax-revenue of the developing countries decreased.

Khattry and Rao (2002) explored the relationship between trade-liberalization and tax-
revenue for 80 industrialized and unindustrialized countries from 1978 to 1999. The results
show that exchange income is negatively correlated with the trade-liberalization, especially in
the developing of countries. They also believe that the adversity of trade revenue may be
repaid in the event of an affected change in domestic tax-revenue. They also suggested that
some of the basic elements played a important role in deciding to trade revenue as a share for
gross domestic product. For example, the dimension of monetary improvement is closely
related to the tariff of GDP, while the trade revenue is inversely to the increase.

Matlanyane and Harmse (2002) surveyed the relationship between trade-liberalization and
South African trade revenue. They believe that trade-liberalization basically affects trade
revenue. The exact result suggests that tariff rate has a negative impact on trade revenue. For
future strategic recommendations, they believe that the good impact of trade-liberalization on
trade revenue requires a huge macroeconomic structure.

Adam et al. (2001) empirically analyzed high exchange revenues may result in a reduction in
local back-off costs. This suggests that the progress of the exchange and the income of the
duties can be accepted for estimation. In a survey by Pupongsak (2009), the use of traditional
voluntary expenditures proved the board information of 134 countries covering the period of
1980-2003, and used the two-way settlement impact method to discover exchange progress
(providing exchange of GDP) The normal rate of taxation and the promotion of business

24
understanding as a number of intermediaries) produced constructive results for global
exchange assessments and local tariffs for 30 low-wage countries.

Rajaram (1992) describes the Pakistani government does not fully understand the structure of
the WTO's responsibility and does not think about the income and progress of Exchange-rate
effects. This suggests that changes in responsibilities should be re-established to reduce the
loss of income. Therefore, before any tax changes are made, the Pakistani legislature should
pay full attention to the WTO's accountability income and exchange process.

Chelliah et al. (1975) made a regression analysis for a group of 47 countries for the period
1969-1971. The results indicate a positive and significant relationship of tax GDP ratio with
trade-liberalization and share of mining in gross domestic product. As expected, there has
been a negative relationship of tax-revenue with share of agriculture in GDP.

25
 SUMMARY OF THE LITERATURE REVIEW

Related studies Country/ Econometric

Data source Findings
(years) Region techniques
Agbeyegbe et al. sub-Saharan IMF, Government Generalized trade openness follow by suitable
(2004) Finance Statistics, Method of macroeconomic plans can be take a way
International Moment that conserves general revenue 2.4
Financial regressions
Summary of some major literature:
Statistics; and
World Economic
Outlook.
Ahmad and chaudhary Pakistan WDI Autoregressive Trade-liberalization and trade tax-revenue
(2016) Distributed Lag were negative and positive impact on tax
(ARDL), structure in both short and long run
VECM is used for
short-run
dynamics of the
variables.
Ahmed & ali (2018) Pakistan WDI, state bank ARDL bound The small impact of exchange promotion
of Pakistan, testing approach in the non-liner era has a negative impact
Pakistan to estimate co- on trade tax income. In the long run, there
Economic integration is a modified U-shaped behavior between
Survey. Pakistan's trade-liberalization and trade tax
income, but this behavior does not exist in
the short term.
Asghar and Pakistan WDI bound test Trade-liberalization is opposite linked with
Mehmood(2017) approach (ARDL) tax-revenue performance
to estimate co-
integration
Mushtaq et al. (2012). Pakistan FBSP, SBP and Time series data, Exchange-rate and population were
ESP (Economic OLS negatively related to tax-revenue whereas,
Survey of trade openness, trade share, GDP and
Pakistan). urbanization were significant and positive
result in relationship on tax-revenue
Shubati & Warrad Middle east World bank OLS & FMOLS The results show that countries with higher
(2018) and north indicator real GDP per capita GDP and lower
Africa exploitation levels have higher government
(MENA) revenues, while the entire population bears 26
negative works in government revenues.
Zakaria,M (2014) Pakistan International Time series data. trade-liberalization motivates both taxes
Financial with the effect being more on later than on
Statistics, earlier thus reducing the trade
 CHAPTER: No. 3

METHODOLOGY OF THE RESEARCH

3.1 Introduction:

Trade-liberalization has so many consequences for its trading countries. The consequence of
trade revenue is one of them for developing countries with the rise of free trade. Economic
theory observed a positive relationship between trade-liberalization and trade revenue. As the
degree of trade-liberalization increases this leads to higher trade volumes results in an
increase in trade tax.

This section of the thesis is based on the theoretical framework as well as the discussion
about econometric model i.e. indigenous and exogenous variables that are the part of analysis
of this research study. Here also discussed the sources of the data, the techniques which was
utilized during analysis.

3.2 Theoretical Framework:

The basic aim of this study was to explain impact on tax-revenue by trade-liberalization in
case study of Pakistan through ARDL approach where tax-revenue depends on trade
openness, GDP, Exchange-rate, urban population, and total population. Tax-revenue has
played more important role for the trade-liberalization of Pakistan. These variables have
positive and significant impact on tax-revenue while population significantly negative impact
on tax-revenue.

During economic development, the significant amount of govt revenue is based on collection
of taxes from different sources. Trade-openness negatively affect the collection of tax-
revenue. According to Keen and Ligthart (1999), financial issues will be limited in trade. The
range of revenue expansion has dropped by about 10% to 15%. In these countries, the
collection of direct costs is very poor. After the trade openness, the tax framework also
ignored the problem of defeating the party. Therefore, the government's revenue collection is
lower than the income before trade.

27
3.3 Data and Variables:

The empirical work is based on the ARDL technique for the purpose of study the for
numerical analysis the ARDL on data was used to examine the impact on tax-revenue by
trade-liberalization in Pakistan.

3.3.1 Explained Variable:

Tax-revenue

3.3.2 Explanatory Variables:

Trade-liberalization

GDP per capita

Exchange-rate

Urban population

Total population

3.3.3 Data collection:

The time series data were used for the analysis and taken from WDI (World Bank Indicator)
and economic survey of Pakistan for the period of 1980-2017 for Pakistan.

Table 1: Sources from Where the Data Taken Accordingly

S.no Name of variable Source

01 Tax-revenue (TR) Pakistan Economic Survey

02 Trade-liberalization (TL) World Bank Indicator

03 Total population (POP) World Bank Indicator

04 Exchange-rate (REE) World Bank Indicator

28
 05 GDP per capita (Y) Pakistan Economic Survey

06 Urban population (UPOP) World Bank Indicator

3.4 Model

The study followed the model borrowed from Asghar & Mehmood (2017) and Mushtaq et, al.
(2012) for impact of trade openness on tax-revenue in Pakistan.

TR = α0 + α1TL + α2GDP + α3EXC + α4UPOP + α5POP + μt

Where

TR = Tax-revenue

TL = Trade-liberalization

EXC = Exchange-rate

UPOP = Urban population

GDP = Gross domestic product per capita

POP = Total Population

µt = error term

3.5 Statistical Software

For the analysis of the data e-views was used to estimate ADF, ARDL short and long run
association of the dependent and independent variables.

3.5 Unit Root Test

The time series data usually are non-stationary, but these variables are stationary at some
level during long period of time. To find out that level some test may apply i.e. ADF and
Pearson to check the stationarity of the data. During this research study ADF were utilized for
observing the stationarity issue of the data.

29
3.6 The Auto-regressive Distributed Lag ARDL Model

There are some basic assumptions of the ARDL model following they are discussed

1. If the variables stationary at 1st difference of at level ARDL could be applied.

2. If the variable stationary both at level and 1st difference ARDL could be applied.
3. If any of the variable stationary at 2nd difference the ARDL cannot be applied.

The ARDL can be applied while taking lag for both dependent and independent variables to
find the association of the variables both long and short run, because this measure become
very famous during last year (shin 1998).

3.6.1 Lag Selection Criteria

In ARDL it is the basic rule that when the observation be less than 60 then Akaike
information criterion must be use.

3.6.2 Bound Testing

Bound testing permit in basic leadership that acknowledge or reject the null hypothesis it
implies no co-incorporation through exist the f value with bound critical estimation of 1(1)
1(0) as made by pesaran et al. (2011). The null hypothesis is rejected when the estimation of f
statistic worth is more prominent than basic bound value then we acknowledged the
alternative hypothesis presuming that their long run exist relationship among factors.

3.6.3 ARDL Long Run

A long run co-integration result causes us to check connection between factors without lags
and the outcomes are deciphered by based on their probability values.

3.6.4 ARDL Short Run

ECM or short run outcomes are utilized to gauge the harmony or modification speed and
show co-integration the relationship. The co-productive connected with this regressor that is
commonly shows speed of alteration and balance for one year. In the event that the factors
are truly co-integrated, at that point their co-productive is negative and essentially high.

30
3.7 Variables Details:

3.7.1 Tax-revenue

Tax-revenue is characterized as the revenues gathered from taxes on pay and profits,
government managed savings commitments, taxes exacted on merchandise and ventures,
finance charges, imposes on the proprietorship and move of property, and different duties.
Total tax-revenue as a level of GDP demonstrates the portion of a nation's yield that is
gathered by the government through assessments. It tends to be viewed as one proportion of
how much the government controls the economy's assets. The taxation rate is estimated by
taking the complete tax-revenues got as a level of GDP. This marker identifies with
government in general (all administration levels) and is estimated in million USD and level of
GDP.

3.7.2 Trade-liberalization

The impact of trade openness on tax-revenue activation is difficult to understand because it

relies on liberalization methods. Gupta (2007) and Keen and Simone (2004) analyzed that
trade openness has a negative impact on tax-revenues, thereby reducing taxation. They
further contributed that the trade openness will have a significant impact on tax-revenues if
the restrictions on import standards are lifted, refunds/concessions, non-tax barriers such as
lifting of custom technology and lowering tax rates are reduced.

3.7.3 Exchange-rate

The exchange rate is negative but important. There are two consequences. Overall, this means
when the volume of currency imports is low and hence the loss of commercial tax revenue.
Along the way, this factor is not significant in statistical terms, indicating that the cost of
imports increases by the dollar and partially compensates for the loss in revenue resulting
from lower commercial taxes.

3.7.4 Gross Domestic Product

Per capita GDP is considered to be an ideal indicator for analyzing a country's complete
economic development, also positively related to tax collection. As per capita GDP increases,
the share of tax-revenues in overall taxation will also increase. The positive correlation

31
between per capita GDP and taxation is further elaborated on the basis of Wagner’s law,
which provides for income elasticity of demand for public goods and services. The income
elasticity of demand for public goods and services means that people need more goods when
their incomes increase, and this increased demand is raised by raising taxes.

3.7.5 Urban Population

Urbanization is seen as positively linked to the tax-revenue collection. The increase of

urbanization has put more pressure on the government, and it is essential to expand the
supply of public goods and services by tax-revenue.

3.7.6 Total Population

Total population is another factor that may affect the implementation of national assessments.
As the number of mature populations increases, it places more emphasis on the state in order
to develop sustainable tax arrangements that will create a sound pension framework for the
prosperity of aged populations.

3.8 The Mean

This is an average and reliable measure of the central tendency to infer a population from a
single sample. The central trend determines the value of your data to be clustered around its
median, mode, or median. The middle of all values is calculated by the sum of the values,
divided by the number of values.

3.9 The Median

This is the "middle" value or midpoint in your data and is also called the "50th percentile."
Note that Median is much less affected by outbound and sketch data. Further it will clarify
with one example: Suppose that you have a dataset of residential rewards, mostly priced in
the range of 100,000 to 300,000, but there are a few houses worth 30 More than a million
dollars. These expensive homes will be highly affected right now because they are a
combination of all values, divided by the number of values. Mediums will not have much
impact on these counters because they are just the "middle" value of all the data points.
Therefore, Median is a more appropriate statistic for reporting your data.

32
3.10 Std. Dev and variance

Standard deviations and variations measure similarities, such as thresholds and IQRs, that
show how our information is transmitted (such as scattering). In this way, they are both
drawn from the middle. This change is recorded by detecting the contrasts between each data
point and middle, squaring them, summarizing them, and then entering these numbers as
usual. When you have a low standard deviation, your data points are closer to the middle. A
high standard deviation means that your data points are spread over a wide range.

Such as in research on a dataset that contains centimeters. They will vary in square
centimeters and for that reason it will be said that the variable may not be the best measure.
Therefore, the standard deviation is used more often because it contains the original singing
and unit values that can be examined. The standard deviation is simply the square root of the
variability, and because of this, the standard deviation values are calculated in the original
unit with the actual geometry calculated.

3.11 Skewness

Skewness is an estimation of the symmetry of a distribution. This shows how much

dispersion exists from mean values either to the left or to the right. The Skewness esteem can
be either positive, negative or zero. Note that in perfect characteristic distribution would have
zero Skewness where the mean value equals to the middle value. Below you can see an
illustration of the different types of Skewness:

Fig. no. 3.1. Illustration of Different Types of Skewness

33
A negative skew occurs if the data is piled up to the right, which leaves the tail pointing to the
left. Note that positive skews are more frequent than negative ones. A good measurement for
the Skewness of a distribution is Pearson’s Skewness coefficient that provides a quick
estimation of a distribution’s symmetry.

3.10. Kurtosis

Kurtosis measures whether your dataset is heavier or lighter than the normal distribution. The
dataset with the higher kurtosis has a heavier tail and the more external and less kurtosis
dataset has the slower and lower outliers. Note that a histogram is an effective way of
displaying both the scans and the kurtosis of a data set because you can easily find it if there
is something wrong with your data. The probability plot is also an excellent tool because the
normal distribution follows only a straight line. A good way to calculate the distribution
kurtosis mathematically is to measure the kurtosis of fishermen. Below the three most
common types of kurtosis. Note that the area under the probability density function curve is
usually always 1, regardless of what type of kurtosis is being dealt with. Measures whether
your dataset is heavy-tailed or light-tailed compared to a normal distribution. Data sets with
high kurtosis have heavy tails and more outliers and data sets with low kurtosis tend to have
light tails and fewer outliers. Note that a histogram is an effective way to show both the
Skewness and kurtosis of a data set because you can easily spot if something is wrong with
your data. A probability plot is also a great tool because a normal distribution would just
follow the straight line. A good way to mathematically measure the kurtosis of a distribution
is fishers’ measurement of kurtosis. Below the three most common types of kurtosis. Note
that the area under a Probability density function curve is usually always 1, no matter what
types of kurtosis were dealing with.

34
Fig. no. 3.2. Illustration of Different Shapes of Kurtosis

A normal distribution is called mesokurtic and its kurtosis is zero or around it. The
platykurtic has a negative kurtosis and the tail is much thinner than the normal distribution.
Leptokurtic distribution has more than 3 cartilage and fat tail means that the distribution is
clustered around the middle and has a relatively small standard deviation.

35
 CHAPTER #4

EMPIRICAL ANALYSIS

4.1 Introduction

This research analysis, examines the impact on tax-revenue by trade-liberalization in case of

Pakistan. This study investigated the impact and result of relationship between tax-revenue
and trade openness. The explanatory variable is tax-revenue while other variables are GDP,
UP urban-population, POP total-population, and Exchange-rate are explained variable. E-
views were used for the analysis of data: ADF Test; VAR Lag Selection; the bound test;
ARDL and other stability of the data were tested during analysis. The impact on tax-revenue
by trade-liberalization in case of Pakistan has 38 observations used time series data from the
period of 1980-2017. All the data for the variables were collected from WDI and further tally
them with economic survey of Pakistan.

Fig. no. 4.1. Flowchart for empirical analysis:

36
Table. No. 4.2. Descriptive Statistical Analysis Table

TR POP REE TY Y UPOP

Mean 3.508 18.684 0.003 33.542 0.046 0.007

Median 3.522 18.710 0.003 33.854 0.032 0.006

Maxmimum 3.661 19.099 0.013 38.909 0.228 0.011

Minimum 3.231 18.173 -0.002 25.306 -0.097 0.000

Std. Dev. 0.102 0.273 0.003 3.269 0.073 0.002

Skewness -0.964 -0.253 0.834 -0.690 0.459 -1.184

Kurtosis 3.756 1.918 3.910 3.268 2.575 7.949

Jarque-bera 6.786 2.261 5.722 3.132 1.623 47.662

Probability 0.0336 0.3229 0.0572 0.2088 0.4443 0.0000

Observation 38 38 38 38 38 38

4.2. Descriptive-Statistics:

This section show the statistical analysis detailed. Our complete data set consists of 38 years
of annual observations from 1980 to 2017. The descriptive statistics are shown in table 4.2
that the mean of TR is 3.507888 with median is 3.522050 and SD 0.102062. Mean for POP is
18.68397 medians is 18.70955 and SD 0.272720. Mean for REE is 0.003049 medians is
0.002567 and SD 0.002976, mean of TY is 33.54199 medians is 33.85413 and SD 3.269385,
mean of Y1 is 0.046266 medians is 0.032278 and SD 0.073230, mean of UP is 0.006898
medians is 0.006073 and SD 0.001748.

37
Majority of the variables were skewed negatively while REE and Y1 they skewed positively.
The kurtosis of the data showed that all variables are platy-kurtic (short tailed or lower peak).
This study found that all the variables are low while the variable UP has the highest kurtosis
value. The Jarque-Bera test shows that the residuals of all variables are normally distributed.

Table. No. 4.3. Correlation matrix

Variable TR POP REE TY Y UPOP

TR 1

POP -0.2129021 1

REE 0.21929619 -0.1274552 1

TY 0.99498291 -0.2033336 0.2574982 1

6

Y 0.22481489 -0.1095529 0.9636571 0.2577810 1

0 3

UPOP 0.31594812 0.2053367 0.2644653 0.3524720 0.29209312 1

4 0 0

4.3. Co-relation analysis

Co-relation matrix shows the relationships between the variables upon each other. Table.
No.4.3 shows that some variables having positive relationship and some having negative
relationship with each other. i.e. the variable (TR) has negative relationships with (POP)
while having positive relationship with all remaining variables. The total (POP) has positive
relationship with (UP) and negative relationship with all remaining variables. Real effective
Exchange-rate (REE), trade income (TY) and (GDP) has negative relationship with (POP)
while having positive relationship with all remaining variables. The urban population (UP)
has positive relationship with all variables.

38
The main variables (TR) and (TY) having positive correlation with each other. According to
correlation matrix (TY) bring changes in same direction to (TR) i.e. as TY increase TR also
increase and vice versa. The results would further analyze and reach for the correct decision
making.

Table. No. 4: ADF Test for Stationary

Level 1st difference

Variables status l(0) / l(1)
t-value Prob. t-value Prob.

TR -1.506 0.5196 -7.519 0.0001 l(1)

TY -1.713 0.4169 -7.736 0.0000 l(1)

Y -5.707 0.0000 l(0)

UP -1.509 0.5180 -51.717 0.0001 l(1)

POP -10.098 0.0000 l(0)

REE -6.084 0.0000 -10.098 0.0000 l(1)

The ADF gives mixed results The ARDL 2nd property are fulfilled as mentioned in chapter 3.

4.4. ADF Unit Root Test:

Unit root test are was used to check the stationarity of the data. The result suggests that 4
variables UP, TY, REE, TR are stationary at 1 st difference, While the Y and POP was
stationary at level.

Table. No. 4.5. Optimal Lag Selection Criteria

Lag LogL LR FPE AIC SC HQ

0 518.6687 NA 7.63e-21 -29.29536 -29.02873 -29.20332

39
1 727.0474 333.4059* 4.16e-25* -39.14557 -37.27915* 38.50128*

2 756.7868 37.38664 7.19e-25 -38.78782 -35.32161 -37.59128

3 803.2098 42.44392 6.95e-25 -39.38342* -34.31743 -37.63464

, Indicates lag order selected by the criterion

4.5. Lag Selection Criteria

In ARDL it is the basic rule that when the observation be less than 60 then Akaike
information criterion must be use. In this research based on the AIC log length because the
numbers of observation are less than 60.

Table. no. 4.6. Bound Test for ARDL

H0 : no long run-relationship exists.

Test Statistic F-statistic K

Value 3.872722 5

Limits of the bound test

Significant I(0) I(1)

10% 2.08 3

5% 2.39 3.38

2.5% 2.7 3.73

1% 3.06 4.15

40
4.6 Bounds Testing

Bound testing permit in basic leadership that acknowledge or reject the null hypothesis it
implies no co-incorporation through exist the f value with bound critical estimation of 1(1)
1(0) as made by pesaran et al. (2011). The null hypothesis is rejected when the estimation of f
statistic worth is more prominent than basic bound value then we acknowledged the
alternative hypothesis presuming that their long run exist relationship among factors.

The given table.no.4.6 shows the results of ARDL Bound Test; the F-value 3.872 is greater
from the upper value at 10%, 5%, and 2.5% level of significance; i.e. 3, 3.38, and 3.73 while
not at 1% which is 4.15. For further analysis null hypothesis rejected at 10%, 5%, and 2.5%
while accept at 1%.

Table. No. 4.7. ARDL (Long-run)

Dependent variable: TR

Variables Co-efficient S. Error t-value P-value

POP -0.087 0.026 -3.298 0.0045

REE -2.471 2.044 -1.209 0.2441

TY 0.036 0.017 20.72 0.0000

Y 0.039 0.125 0.314 0.7577

UPOP -28.082 6.952 -4.039 0.0009

C 4.105 0.495 8.283 0.0000

EC=TR-(-0.0869* POP -2.4711* REE +0.0361* TY +0.0392*Y - 28.0818* UPOP +4.1047)

41
4.7 Long Run Co-Integration ARDL Model

The results show the long-term relationships, Table 4.7 summarizes the bound tests that show
the long-term results of the ARDL model. Time series data is important to keep a strategic
distance from stationary regression investigations, as it is difficult to obtain solid results and
to evaluate with non-stationary series. Augmented Dicky Fuller (ADF) is used to test
stationary factors. All factors have been examined and discovered that there are stationary
levels at some level, and some are at first discrepancy. The ARDL was employed in the test
to test this relationship for a long time. In this case, some variables are stable on the 1 st
difference.

Long run results are shown in Table 4.7 that the relationship trade-liberalization (TY) has
significantly positive impact with tax-revenue(TR) co-efficient (0.036) and Std. Error (0.002)
which revealed and make the decision clear regarding policy making, In the similarly total
population has significantly negative impact with tax-revenue co-efficient (-0.087) and Std.
Error (0.026) which replicate inverted U-shaped association, real reflective Exchange-rate
(REE) also shows significantly negative impact on tax-revenue co-efficient (-2.471) and Std.
Error (2.044). GDP (Y) has shown a significantly positive impact tax-revenue co-efficient
(0.039) and Std. Error (0.125), similarly the urban population is also having significant
negative impact on tax-revenue co-efficient (-28.082) and Std. Error (6.952).

The main variables of the study trade-liberalization and tax-revenue explored positive
relationship here and make the correlation matrix result clear, where the relationship was
negative but insignificant which revealed no meaning. But here now it become clear that
trade-liberalization increases tax-revenue in long run instead to decrease it in Pakistan.

42
Table.4.8. ARDL (Short run)

Dependent variable: TR

Name of Co-efficient S. Error t-value p-value

variable

D(pop) 0.4748 0.0878 5.4093 0.0001

D(TY) 0.0304 0.0004 82.3740 0.0000

D(TY(-1)) -0.0019 0.0005 -3.5674 0.0026

D(TY(-2)) -0.0011 0.0004 -2.7616 0.0139

D(TY(-3)) -0.0014 0.0003 -4.3616 0.0005

D(Y) 0.0886 0.0163 5.4239 0.0001

D(Y(-1)) 0.0410 0.0126 3.2676 0.0048

D(Y(-2)) 0.0371 0.0128 2.9007 0.0104

D(Y(-3)) 0.0208 0.0091 2.2783 0.0368

D(UP) -19.9169 3.5896 -5.5484 0.0000

D(UP(-1)) 27.1263 4.6996 5.7720 0.0000

CointEq(-1)* -0.6379 0.1045 -6.1053 0.0000

43
4.8. ARDL (Short run)

The ECM is considering good fitted if the value lies between -1 and 0, but less than -2. ECM
must be significantly negative and the value of ECM of this analysis was -0.637. This show
that the speed of adjustment of the past disequilibrium may adjust by 63% in current period.

4.9. Test for the Diagnosing of Data and Model:

4.9.1. The Serial Co-relation test

The prob. of Obs R2 in the given table.no. 4.9.1 is 0.1097 which greater than 0.05 so the null
hypothesis may accept, and the data has no serial co-relation issue.

Null hypothesis: No serial correlation at up to 2 lags

F-statistic 1.046 Prob. F(2, 14) 0.3773

Obs *R-squared 4.420 Prob. Chi-square(2) 0.1097

4.9.2. The Heteroscedasticity Test:

If the heteroscedasticity results significant then there should be the issue of normality in the
model the table.no. 4.9.2 show that Obs Prob value is 0.3858 that is more than 0.05 so the
null hypothesis should be accepted and there is no issue heteroscedasticity in the model.

Table 4.9.2. The Heteroscedasticity

Heteroscedasticity Test: Breusch-Pagan-Godfrey

Null hypothesis: Homoscedasticity

F-value 1.0649965 Prob. F(17, 16) 0.4519

Obs R2 18.04898 Prob. Chi-square(17) 0.3858

44
S-S explained 6.285742 Prob. Chi-square(17) 0.9911

4.10. Comparison

The research is showed to test the impact of trade-liberalization on tax-revenue in Pakistan

for the time period from 1980-2017. It is analysed that trade-liberalization has positive and
significant impact of tax-revenue as compared Asghar and Mehmood (2017) examined the
relationship tax-revenue and trade-liberalization have inversely related to each other in case
study of Pakistan; Ahmad and chaudhary (2016) results was showed that trade-liberalization
and trade tax revenue were positive and negative effect both long-run and short-run; Mushtaq
et al. (2012) their analysis concluded that trade-liberalization, UP, GDP were significant
positive impact on tax-revenue while, POP and exchange-rate was negative effect.

45
 CHAPTER: 5

CONCLUSION AND POLICY RECOMMENDATION

5.1 Introduction

This chapter includes the conclusion from the results obtained in the previous chapter as well
as the policy recommendation to the government and the operational body of the economy on
the basis of results and the conclusion drawn from the entire research study.

5.2 Conclusions:

The time series study empirical studied the effect on tax-revenue by trade-liberalization by
with check variables of real effective Exchange-rate, urban population, total population and
gross domestic product for the period 1980-2017. During the study, the basis of literature
reviewed was developed by a multiple regression model.

It was concluded that the process of estimation used time series characteristics of variables in
ADF unit root test was employed. Result of the study showed that trade-liberalization, urban
population, tax-revenue and exchange-rate are stationary on 1 st difference, whereas total
population and gross domestic product are stationary at level in this study.

Trade-liberalization is certainly significant if Pakistan needs to increase the tax-revenue as

there exists a positive relationship between trade-liberalization and tax-revenue. Further,
positive impacts on tax-revenue have urban pop, trade-liberalization and GDP, while POP
and exchange-rate is negatively connected to tax-revenue.

We have applied Ramsay Reset test for functional form, Breusch-Godfrey Serial correlation
LM Test, Breusch Pagan Godfrey Heteroscedasticity Test and Normality Jarque Bera Test to
find the integrating properties of the variables. The presence of co-integration is tested by
applying the bounds testing (ARDL) method to co-integration in the occurrence of structural
break arising in the variables.

46
5.3 Policy Recommendations:

The finding and discussion of the study allow as the follows these policy recommendations.
The positive link between urbanization and the implementation of tax-revenue helps to gain a
better understanding of property-tax collections in urban areas and rent values for urban
immovable properties. By restoring the entire tax arrangement for managing urban persistent
property, the government can generate considerable revenue. The government should
withdraw non-essential exceptions for all types of personnel. The government should strictly
employ strict non-unfair authorization arrangements to stay away from interest rate
differences and improper assessment of urban property.

On the one hand, the government should increase the tariff rate, while, on other hand, the
government should improve the domestic fiscal structure. With the help of proper economic
documents, Pakistan should reduce tax evasion and inefficiency in domestic tax collection
restrictions. At this point, we may be able to overcome the loss of trade revenue by improving
direct taxation.

5.3.3 Solutions
The problem of revenue shortfall due to trade openness, the solution is of two steps.

1. The government has to make full efforts for maximizing the revenue from custom
tariff.
2. There is need to eliminate the distortions in domestic tax system which delay the
process of revenue generation.

47
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