Page 56 - CMA Journal (Jan-Feb 2026)

Articles Section

In low-income countries, income taxes make up roughly highlighted was tax holidays given to industrialists,
one-third of total tax revenue, while they account for which encouraged investment in manufacturing. Hence,
about half to two-thirds of total tax revenue in middle- it is essential for fiscal incentives to promote exports in
and high-income countries. Moreover, reallocating taxes trade policies.
from income to property taxes is linked to a stronger and
A study by the World Bank, which sampled 20 countries
more positive impact on long-term economic growth
to compare high-tax and low-tax countries, indicated
compared to shifting them toward consumption taxes
that exports rose in countries with low indirect taxes and
(Acosta-Ormaechea & Yoo, 2012).
duties. The primary reason was that their tax policies
Another study indicates that increasing tax cuts may lead greatly reduced profits by raising costs in potential
to a budget deficit, increase the cost of capital by raising export areas, and entrepreneurs became attracted to
interest rates, and depress business investment. A higher concentrate production in protected home markets,
taxation rate may hamper economic growth as it which discouraged foreign investors who could have
determines the amount of investment in a country, brought managerial know-how, technology, and
prevents businesses from having the incentive to invest marketing needed for export success.
in physical and human capital, and deprives them of
Similarly, low-tax developing countries were able to
creativity (Kawano et al., 2025).
attract more foreign direct investment. In contrast,
Pakistan has not been able to capture the upper class, high-tax countries experienced deterrence of investment
who do not pay taxes. In Pakistan, where people have by foreign investors, whereas domestic residents
less regard for social welfare, they tend to evade taxation. channeled their funds into unproductive activities such
It is highly necessary to reform the tax system and as speculation in real estate (Marsden, 1983).
enhance tax efficiency to prevent tax evasion. Also,
Therefore, it is recommended that tax administration
improving public trust by ensuring that funds are
and collection be carried out efficiently so that it does

channeled to useful projects can help in increasing the
not hamper economic growth. China has been reforming
amount of tax revenue. It is also recommended that
its current tax system and introducing digital inclusive
lesser tax should be charged to maximize tax income,
finance schemes. Digital inclusive finance schemes offer
thereby incentivizing higher spending and earnings
diversified financing options by including financial
from sales tax, and these earnings can be used in
services for the government. This can promote tax
providing assistance to industrial promotion (Balouch et
compliance, improve fiscal transparency, expand the tax
al., 2022).
base, and help reduce debt levels of local government
Studies show that tax cuts for the lower-income group (Wang & Li, 2025).
tend to increase employment more than tax cuts for the
In conclusion, taxes play a vital role in the economy of
high-income group. The reason is that the low-income
every nation, and their levels must be optimally set to
group has a higher marginal propensity to consume. The
contribute to economic growth. This is because higher
result of a tax cut may boost domestic demand and
tax rates tend to be more distortionary, thereby harming
economic growth. However, tax cuts on the high-income
growth, whereas lower rates can still generate revenues
group may promote investment in human capital and
that may be used productively. Empirical studies,
innovation in the long run (Zidar, 2019). A study indicates
however, reveal both positive and negative links
a negative impact of tax havens on the economy, as they
between tax burdens and economic growth rates.
adversely affect revenue collected for the budget,
Therefore, achieving an optimal tax rate could raise
whereas high taxation rates may lead to tax avoidance,
future economic output, allowing lower tax rates to
capital outflow through lawful and unlawful channels,
generate higher revenues. For a low-growth economy
and create financial instability and crises (Radu, 2012).
such as Pakistan, the best possible solution is to improve
Pakistan’s tax system mostly depends on revenue the quality of the tax structure. Fiscal incentives should
collected from indirect taxes. A recent study shows that be given to areas with high yields of income, such as
in the case of the European Union, revenue collection exports. Low taxes may encourage development
from indirect taxes is less efficient as it induces inequity, patterns that raise economic growth and reduce poverty
leading to a reduction in production and sales within the in society.
economy. It is therefore suggested to collect revenue
About the Author: Hafsa Ahmad graduated from the National
from direct taxes, as it is more efficient to support
University of Science and Technology (NUST) with a master’s degree
economic growth (Stoilova & Patonov, 2012). in economics. She has worked in the Policy Implementation Unit
(PIU) at the Central Power Purchasing Agency (CPPA) as a Research
It was in the 1960s when Pakistan was experiencing rapid
Associate for two years. Her expertise includes econometric
economic growth resulting from industrialization and
modeling, data analysis, and report writing.
agricultural development. The reason mostly
54 ICMA’s Chartered Management Accountant, Jan-Feb 2026