Direct Tax And Its Influence On Economic Growth And Household Consumption Expenditures:A Comparative Study Of Pakistan And China

The present study was conducted to analyze direct taxes and its influence on economic growth as well as to investigate how household consumption expenditures affect by imposing tax on salaries of individuals.This is a comparative study between Pakistan and China.We have conducted our empirical analysis by specifying three different models.The first model is about to examine how personal income tax,corporate income tax,inflation,dependency ratio and investment affect economic growth in Pakistan and China.The second demonstrates the combine effect of personal and corporate incomes taxes on economic growth in both countries.In first model,we have checked the separate impact of personal and corporate income taxation on economic growth but in second model,we have combined both taxes and then checked its impact on economic growth.The third model depicts the effect of personal income tax,inflation,disposable income and savings on household consumption expenditures.Time series data was utilized from 1986-2015.The data sources are,the World Bank(World Development Indicators),State Administration of Taxation of People's Republic of China(SAT)and State Bank of Pakistan(SBP).The data was converted to logarithmic form because it provides proficient and reliable results.The logarithmic form not only smooths the data,but also overcomes the problem of heteroskedasticity.In present study,we used Augmented Dickey Fuller test(ADF)to check the stationarity level between variables.Moreover,we applied autoregressive distributed lagged(ARDL)model and Johanson cointegration technique in order to find out long run and short run relationship between variables.In empirical analysis,first of all,stationarity of all variables was checked then we applied bound test to check long run bond among variables.The results of first model demonstrated negative and significant impact of personal income tax,corporate tax and inflation on economic growth for China and Pakistan.For Pakistan,dependency ratio showed adverse impact on economic growth,but showed positive and insignificant impact in case of China.Investment showed positive but significant relationship with growth in both countries.In short run,for Pakistan,the value of ECM term was-0.47.The ECM value indicates that deviation from short run to long run dynamics will be adjusted by about 47%after each year.The ECM value in case for China was-0.90 means that 90%convergence towards short run to long run equilibrium within a year.The second model showed personal income tax,corporate income tax and inflation had negative correlation with economic growth in Pakistan and China.Dependency ratio showed positive correlation in case of Pakistan but negative relationship for china.In third model,that is household consumption expenditures model,personal income tax showed negative and significant impact on household consumption expenditures for both countries.Inflation had positive and significant impact for Pakistan,but negative and significant influence in case of China.Disposable income showed positive but significant relationship for both countries.Savings showed negative and significant relationship for Pakistan but insignificant relationship for China.The ECM value was-0.79 which showed 79%convergence from short run to long run.In case of China,ECM value was-0.32 which showed 32%convergence from short run to long run.The t-values in short run results were highly significant.The stability of all models was checked through Cumulative Sum of Recursive Residuals(CUSUM)and Cumulative Sum of Squares Recursive Residuals(CUSUMSQ)tests.The stability of the models identified the stability of parameters,as values lie inside critical bounds at 5%significance level.