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Pakistan tax reforms a blueprint for developing countries

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Taxation reforms implemented in Pakistan over the past year could be used as a benchmark for other developing countries struggling to collect tax revenues, according to an LSE economist.

The reforms, made possible by collaboration between independent researchers at the International Growth Centre (IGC) and the Pakistan government, are expected to increase revenue streams to fund basic services for a population of around 180 million people.

Speaking at Growth Week 2013, held at the London School of Economics and Political Science, economist Dr Johannes Spinnewijn outlined the basis for policy changes to Pakistan’s taxation system which are designed to cut down on tax evasion.

Pakistan’s current tax revenue is just 8.5 per cent of its GDP – a “paltry amount” to service the needs of an emerging economy, the London School of Economics and Political Science researcher said.

The evasion of corporate taxes, which raise about 25 per cent of all federal revenue, is a big problem in Pakistan.

“Like many countries facing this problem, Pakistan has implemented a minimum tax system under which businesses who declare low profits are taxed on their revenues instead. Our research has provided strong evidence that taxing revenues, rather than profits, can be desirable in developing countries where tax evasion is rampant. This reduces evasion by up to 70 per cent of profits,” Dr Spinnewijn said.

The IGC’s close collaboration with Pakistan’s Federal Bureau of Revenue has resulted in a unique partnership between a research institute and a government tax department.

The relationship has generated a number of IGC projects to tackle the inefficiencies in Pakistan’s tax system, including research by Professor Henrik Kleven and PhD student Mazhar Waseem which has helped close loopholes, making it more difficult for tax payers to manipulate the system.

Research by LSE economics PhD student Michael Best on “Overcoming Frictions in the Labour Market: Responses by Firms and Workers to Taxes in Pakistan” is also being presented at Growth Week 2013.

Additional information for editors

To interview Dr Spinnewijn or any of the speakers appearing at Growth Week, or to obtain a copy of their papers, contact Jeanett Rosbak from the IGC on j.i.rosbak@lse.ac.uk| or +44 (0) 20 7955 6988.

Growth Week (September 23-25) is the flagship annual conference for the International Growth Centre, a joint initiative with LSE and Oxford University with offices across the developing world. Growth Week brings together researchers and policy makers from developing countries to discuss and address real-world policy needs. The IGC is funded by the UK Department for International Development. Find out more at www.theigc.org|

Dr Johannes Spinnewijn is a lecturer and assistant professor at the London School of Economics and Political Science. He graduated in economics from the University of Leuven and the French speaking ULB in Brussels, and received his doctorate from the Massachusetts Institute of Technology MIT.

September 24, 2013

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