Page 55 - CMA Journal (Jan-Feb 2026)

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Tax Burden or Growth Engine?

The Dual Role of Taxation in the Economy

Governments generate revenue through tax as it is a decreases growth

sustainable source for different fiscal policy tools. (Kalaš et al., 2017).
Taxation is a contributing factor to economic growth as it Some studies reveal
increases government sources of revenue, through that tax cut policies
which they invest in infrastructure that encourages seem to have no
employment opportunities and fosters economic significant effect on
growth. Taxation plays a key role in sustainable promoting business
development as governments require revenue to fund and may even
public services such as education, healthcare, social decrease economic
safety nets, and improve living standards. growth. However, tax
cuts in the overall US
A major initiative in Pakistan is to attract FDI with the
states may increase
help of foreign investors by encouraging them to
gross state product,
establish their business in the country. To achieve this
personal income, and
objective, studies show that tax haven countries were Hafsa Ahmad
reduce inequality. The
able to attract a higher number of multinational Economist and
reason is that
corporations as compared to non-tax haven countries. Policy Researcher
business revenues are
The reason is international tax competition; by reducing
less responsive to the
tax rates, countries can attract capital from abroad
impact of taxes as businesses may pass on their tax
(Tørsløv & Wier, 2020). A foreign investor may not want to
burden to consumers (Prillaman & Meier, 2014).
invest capital in a country where the tax rates are high
and the profit of business is low. Hence, they will choose Some studies have shown a negative relationship
to invest in a country where ease of doing business and between taxation and economic growth. A study on
low tax rates are available (Ahmad et al., 2020). Nigeria showed that tax has a negative but insignificant
impact on economic growth; hence it is advised to
By focusing on free trade zones, which may help reduce
improve the mechanism of tax collection (Akanbi, 2020).
export restrictions, and infrastructure development,
A study of Jordan indicates that direct taxes have a
Pakistan may attract foreign investments. Similarly, by
negative impact on economic growth; hence, reducing
offering tax exemptions and investment incentives, we
tax rates may increase public consumption and revive
can attract capital inflows and generate new sources of
business when the country is facing economic crises
revenue for the government (Esmailizadeh et al., 2025).
(Basha, 2022).
Growing international competition and rising demand
Different studies have been conducted in Pakistan. For
for publicly funded services are pushing countries to
instance, Malik and Meraj (2024), found that both taxation
design more efficient tax systems. An efficient tax system
as well as political stability increase economic
can only be developed by recognizing how different
development. Also, in a recent study, tax revenue and
forms of taxation may be distortive or detrimental to
inflation have a negative influence on economic growth,
growth. Despite having well-developed tax systems and
whereas gross fixed capital formation and tax expenditure
access to high-quality data, even advanced economies
raise economic growth (Shafiq et al., 2022). In another
still lack complete clarity on how taxation affects
study, it is mentioned that direct taxes have a positive
economic growth.
effect on economic growth, while indirect taxes may
There have been numerous studies on the impact of hamper economic growth in Pakistan (Khan et al., 2022).
taxation on economic growth. For instance, a study
Pakistan’s tax regime is regressive in nature, which
related to Thailand showed that income tax helped in
disproportionately burdens the salaried class and small
reducing inequality as it promoted investment, employ-
businesses. This has led to a decrease in domestic
ment, consumption, and GDP (Alqadi & Ismail, 2019).
demand and impeded business growth, resulting in
Similarly, in the case of the United States, an increase in
slower economic growth. A study shows that
tax rates and social security contribution stimulates

high-income countries depend far more on direct taxes
economic growth, whereas a rise in corporate taxes
compared to lower-income nations.
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