Tax Evasion Impact of Progressive Taxation

Table of Contents
Certificate of Approval Declaration Abstract Acknowledgements Chapter 1: Introduction: ........................................................................................................................................................... 7-12

1.1 Background of the Problem ................................................................................................................................ 7 1.2 Problem Definition .............................................................................................................................................. 8 1.3Mangerial & academic Concerns ......................................................................................................................... 8 1.4 Research Objectives ............................................................................................................................................ 9 1.5 Definitions ........................................................................................................................................................ 10
Chapter 2: Literature Review ................................................................................................................................................. 13-16 Chapter 3: Methodology & Choice of Analytical Technique ............................................................................................... 17-22

3.1 Research Type ................................................................................................................................................... 17 3.2 Data Type & Reference Period.......................................................................................................................... 17 3.3 Research Hypothesis ......................................................................................................................................... 17 3.4 Theoretical Framework ..................................................................................................................................... 20
3.4.1 Variable Reference List .......................................................................................................................................... 21 3.4.2 Theoretical Justification of Variables ..................................................................................................................... 21

3.5 Information Gathering & Sampling Procedures ................................................................................................ 21

3.5.1 Survey Design ........................................................................................................................................................ 21 3.5.2 Data Reliability & Internal Consistency................................................................................................................. 22 3.5.3 Missing Data .......................................................................................................................................................... 22

3.6 Data Analysis Tools & Techniques ................................................................................................................ 22

Chapter 4: Estimation , Analysis & Conclusion .................................................................................................................... 23-36

4.1 Results of statistical Techniques ....................................................................................................................... 23 4.2 Analysis of Findings .......................................................................................................................................... 24 4.3 Limitations ........................................................................................................................................................ 26 4.4 Conclusion ......................................................................................................................................................... 26
References...................................................................................................................................................................................... 28 Appendix 1: Data Sheet ................................................................................................................................................................... i Appendix 2: Regression Analysis.................................................................................................................................................. iv Appendix 3: Scatter Plots ............................................................................................................................................................. xv

Tax Evasion Impact of Progressive Taxation; 2 CHAPTER 1: INTRODUCTION

How people are taxed, who is taxed, and what is taxed tell more about a society than anything else.1

Tax is one of the most important components in determining the amount of Revenue, Government can spend in the Developing and Non-Developing expenditures in Public Finance. However in case of Developing Countries the main issue or hurdle in Tax or Collection of Tax Revenue is Tax Evasion. Tax Evasion in common language is known as the amount of tax that is not collected due factors like corruption, tax avoidance and alike.

This paper is divided into two sections, first the Tax Evasion will be defined and various factors contributing to this Cancer of Economy (Tax Evasion) will be discussed. Secondly, the impact of Progressive Taxation, the main factor effecting Tax Evasion, will be discussed.

1.1

Background of the problem / problem development

As stated earlier that Tax Evasion is the root cause for the low level of Revenue for the Government and consequently level of Developmental Expenditures are on the lesser side. Pakistan being a developing country is facing the same issue and is unable to come with success in lowering Tax Evasion. According to Ali Kemel, Tax evasion was increasing rapidly in the

C. Adams (1993). For Good and Evil. The Impact of Taxes on the Course of Civilization. London: p.21

Tax Evasion Impact of Progressive Taxation; 3 early 1980s but the rate of increase accelerated in the 1990s. It declined in 1999, but reverted to an increasing trend until 2003. (PIDE Working Papers 2007:13). Since Tax Evasion increases the purchasing power of individuals, they tend to indulge themselves in activities like smuggling, non compliance with tax, reporting lesser income in documentation and alike. In order to decrease this problem that is a hurdle in the economic development of the country, Government should take some firm steps to encounter it. This study will evaluate those factors that are contributing to Tax Evasion and not completely but slight give an insight to the root cause of the problem and some possible solutions.

1.2

Problem Definition

The main objective of this paper is to describe Tax Evasion and its factors and secondly to see the impact of Progressive Taxation on Tax Evasion. The Definition best describing the above issue is as follows: Tax Evasion in Pakistan and the Impact of Progressive Taxation on Tax Evasion

1.3

Managerial And Academic Concerns

The study does have extensive managerial and academic application and thus is having broad generalizability in both the academics and managerial areas. Managerial Concerns: Tax is the major head in the Total Revenue generation by the Government and hence is of great importance to the policy makers. As tax is an essential part of public finance, it holds vital importance in the decision making by the think tanks of Government. The Government officials

Tax Evasion Impact of Progressive Taxation; 4 and public finance departments do use all the figures relating tax in formulation of policies and to take important decisions about both the monetary and fiscal policy of the country.

Academic Concerns: As business studies are gaining more and more importance in Pakistan and Business schools like Lahore University of Management Sciences (LUMS) and Lahore School of Economics (LSE) are giving deserved weight age to the courses of Public Finance, the study of Tax and its importance to the economy has increased. Business students take keen interest in courses regarding Public Finance and are gathering knowledge that can lead to the betterment of Tax Revenue and Taxation Network in Pakistan.

1.4

Research Objectives

The core objective of this research paper is to:

To test the preposition that progressive taxation has a significant/insignificant impact on tax evasion

This will be done through determining the relationship of various variables which are relevant to the topic. Hence the study seeks to:

To test the preposition that of Progressive (Direct) Taxation has a significant/insignificant impact on Tax Evasion

Tax Evasion Impact of Progressive Taxation; 5 To test the preposition that Underground Economy has a significant/insignificant impact on Tax Evasion To test the preposition that Corruption has a significant/insignificant impact on Tax Evasion To test the preposition that Tax Avoidance has a significant/insignificant impact on Tax Evasion To test the preposition that Unemployment has a significant/insignificant impact on Tax Evasion To test the preposition that Inflation has a significant/insignificant impact on Tax Evasion To test the preposition that Tax System has a significant/insignificant impact on Tax Evasion To test the preposition that Income Inequalities has a significant/insignificant impact on Tax Evasion To test the preposition that Tax Audits has a significant/insignificant impact on Tax Evasion 1.5 Definitions

Below is the glossary and operational definitions of variables being used in this study:

Tax Evasion Impact of Progressive Taxation; 6 Years Glossary Definition 1. The deliberate failure to pay taxes (usually by making a false report) 2. Tax evasion refers to illegal activities undertaken by taxpayers to escape paying taxes. 3. Illegally paying less in taxes than the law permits or committing fraud in filing taxes. 1. A convex tax schedule that results in a higher effective tax rate on high income levels than on low-income levels. 2. A progressive tax is a tax by which the tax rate increases as the taxable amount increases. Operational Definition Tax Evasion is the Gap between the Target Revenue Collection and the Actual Revenue Collection

Tax Evasion

Progressive Taxation

A convex tax schedule that results in a higher effective tax rate on high income levels than on low-income levels. The Tax that has been exempted from collection. Example of tax Avoidance will be Pensions and other legal ways through which people/companies exempt themselves from Tax Payment Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

Tax Avoidance

1. Tax avoidance refers to the legal means by which taxpayers can reduce their tax bill. Examples would be investing in tax-free municipal bonds 2. Making full use of reliefs and exemptions to ensure as little tax as possible is paid. 1. Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. 2. An overall rise in prices. 3. Increase in the overall level of prices over an extended period of time.

Inflation

Tax Evasion Impact of Progressive Taxation; 7 An expression used to describe all market exchange that goes unreported either because it is illegal or because those involved want to evade taxes. The underground economy or black market is a market where all commerce is conducted without regard to taxation, law or regulations of trade. 1. A legal system for assessing and collecting taxes 1 Number of people who are not in work, but who are available for and actively seeking work. 2. Unemployed - not engaged in a gainful occupation; "unemployed workers marched on the capital" Willingness to Pay Tax

Underground Economy

The underground economy or black market is a market where all commerce is conducted without regard to taxation, law or regulations of trade. A legal system for assessing and collecting taxes Unemployed - Willing and able to work, looking for work, and without a job.

Taxation System

Unemployment Tax Morale

Different Incentives offered to tax payers upon successfully and honestly paying the taxes

Tax Evasion Impact of Progressive Taxation; 8 CHAPTER 2: LITERATURE REVIEW Tax Evasion in this paper is being described as follow: Tax Evasion is the gap between the Estimated Tax revenue and the Actual Collection of Tax revenue. Previously many people have tried to explain what tax evasion is and what are the factors that are playing the vital role in the increase of Tax Evasion? According to Robina Athar Ahmed and Mark Rider A countrys Tax gap is the amount of tax that goes uncollected due to non-compliance with the tax law. (International Studies Program Working Paper 08-11 December 2008). Since the non collected tax is never mentioned in the documents it is very difficult to have an exact estimation of the Tax gap in a country. In FY year 2004-2005 the gap was estimated to be Rs. 409.50 billion making it 69% of total tax receipt. (Robina Ahmed and Mark Rider: International Studies Program Working Paper 08-11 December 2008) Generally by Tax evasion people think of corruption and other such negative activities but tax evasion is also caused by non-compliance by tax laws. According to Robina Athar Ahmed and Mark Rider People often think tax evasion as being motivated by greed or avarice, but other motives plays a role as well. For Example, people may fail to comply with tax laws for a number of reasons, including poor health, ignorance and sloth. Even though we use the tern Tax Evasion, we have in mind all forms of non-comliance with the tax law, whatever its underlying motivation.(International Studies Program Working Paper 08-11 December 2008) But illegal activities constitute the major chunk in total Tax Evasion. Almost all the transactions made in the underground economy are through cash, e.g., payments to the contractual workers, transactions in illegal sales, transactions involved in smuggling and drug trafficking, cash

Tax Evasion Impact of Progressive Taxation; 9 payments to the shopkeepers who do not provide valid cash memos etc. (M. Ali Kemal: PIDE Working Paper, 2007) The solution to this problem is very vague. Increase in tax evasion is mostly associated with the fiscal policy, i.e., increase in tax rates erodes the tax base, which eventually reduces the willingness to pay taxes even when the Government reduces the tax rates. (M. Ali Kemal: PIDE Working Paper, 2007) Various studies have been done in order to see the relationship between Underground Economy and Formal Sector Economy. Empirical findings of Schneider (1998) show that at least two-third of the income earned in the shadow economy is immediately spent in the official economy. However, some studies show opposite results, e.g., Yasmin and Rauf (2003) conclude that the underground economy and tax evasion affects formal GDP2 negatively in Pakistan. (M. Ali Kemal: PIDE Working Paper, 2007) According to Salman Aslam (The Pakistan Development Review, 1998) that the Tax Evasion and underground Economy is of a mjor concern in Pakistan for decades. He says that it is not the presence but the size of the underground economy that is crucial for the policy makers. Underground economy generally exists in every country, however, the policy-makers are especially concerned about the rise of the underground economy. It creates difficulties for the policy-makers to formulate the policy especially the monetary policy. (M. Ali Kemal: PIDE Working Paper, 2007) In order to counter with such problems, taxation system should be strong and capable enough to sight these issues and come up with feasible solutions so that willingness to pay takes remains on the higher side and produce positive results for the economy. Elite attitudes towards

Tax Evasion Impact of Progressive Taxation; 10 the purpose of the state and what type of state taxation should fund, are therefore critical for an effective tax system. (Mark Everest-Phillips, WIDER Elite Conference 12 June, 09) One of the solutions that can be tested in order to increase the revenue generation from tax and to decrease the burden of Tax on the lower income is through applying Progressive Taxation. In this paper, by progressive Taxation we simply mean that higher the tax rate as the income level goes up. The root cause of weaknesses in tax systems in developing countries is ultimately not poor tax policy or capacity constraints in tax administrations but the lack of political agreement among those with political power and influence (the lites) to make taxation effective. (Mark Everest-Phillips, WIDER Elite Conference 12 June, 09). Elites fear an effective tax system as threatening redistribution not just of their wealth but, more importantly, of their power base. Creating effective tax system is therefore a collective action problem (how to fund public and collective goods). (Mark Everest-Phillips, WIDER Elite Conference 12 June, 09) According to Moore(2007, 14-15), [] if state lites need to depend on general taxation because they lack alternative, easier revenue sources, they generally have to put considerable organisational and political effort into obtaining the revenue, and face strong incentives to bargain and negotiate, directly or indirectly, with at least some taxpayers, rather than simply to extract revenue forcibly. In other words, dependence on general taxation provides incentives for state lites and taxpayers to resolve their differences through bargaining. (Mark EverestPhillips, WIDER Elite Conference 12 June, 09) Hence just increasing the tax rate or the indirect tax will not help in achieving the desired revenue from taxation. Apart from increase in taxation Rates, Tax Morale and making Masses compliance with Tax Laws will help a great deal.

Tax Evasion Impact of Progressive Taxation; 11 Citizens tax culture and morale are significantly and positively associated with their perception of the benefits derived by society from the public delivery of goods and services, weighted against the risk of free-riding by others (Everest-Phillips and Sandall 2008) In developing country contexts, where often huge inequalities, weak government capacities and the economy controlled by narrow elites often limit the prospects of improvements to both administrative capacities and to tax morale. Yet tax morale is poorly understood even for developed countries with usually stronger governance contexts (Torgler 2007).

Tax Evasion Impact of Progressive Taxation; 12 Chapter 3: METHODOLOGY AND CHOICE OF ANALYTICAL TECHNIQUE

3.1

Research Type Secondary in Nature Applied Research as the findings will be applicable to real life phenomenon

3.2

Data type & Reference Period Secondary in Nature Reference Period is 1999-2009

3.3

Research Hypothesis

The Basic Research Hypothesiss of this Research paper are as follow

Impact of Progressive Taxation on Tax Evasion

H0: To test the hypothesis that Progressive Taxation has insignificant impact on Tax Evasion H0:0=0 H1: To test the hypothesis that Progressive Taxation has significant impact on Tax Evasion H1:00 Impact of Underground Economy on Tax Evasion

H0: To test the hypothesis that Underground Economy has insignificant impact on Tax Evasion H0:0=0 H1: To test the hypothesis that Underground Economy has significant impact on Tax Evasion

Tax Evasion Impact of Progressive Taxation; 13 H1:00

Impact of Tax Avoidance on Tax Evasion

H0: To test the hypothesis that Tax Avoidance has insignificant impact on Tax Evasion H0:0=0 H1: To test the hypothesis that Tax Avoidance has significant impact on Tax Evasion H1:00

Impact of Unemployment on Tax Evasion

H0: To test the hypothesis that Unemployment has insignificant impact on Tax Evasion H0:0=0 H1: To test the hypothesis that Unemployment has significant impact on Tax Evasion H1:00 Impact of Inflation in Tax Evasion

H0: To test the hypothesis that Inflation has insignificant impact on Tax Evasion H0:0=0 H1: To test the hypothesis that Inflation has significant impact on Tax Evasion H1:00 Impact of Tax System on Tax Evasion

H0: To test the hypothesis that Tax System has insignificant impact on Tax Evasion H0:0=0 H1: To test the hypothesis that Tax System has significant impact on Tax Evasion

Tax Evasion Impact of Progressive Taxation; 14 H1:00 Impact of Tax Audits on Tax Evasion

H0: To test the hypothesis that Tax Audits has insignificant impact on Tax Evasion H0:0=0 H1: To test the hypothesis that Tax Audits has significant impact on Tax Evasion H1:00

Tax Evasion Impact of Progressive Taxation; 15 3.4

4

Theoretical framework

Progressive Taxation
1. 2. 3. Direct Tax Indirect Tax Wealth Tax

Robina Ather Ahmed & Mark Rider (Int. Studies Program, Dec 08)1

Tax Morale
(Max EverestPhillips, WIDER Elites conference 3 12 June 09)

Tax Avoidence
Pensions Malfunctioning of Data

(M.Ali Kemal,PIDE Working 2 Paper, 2007)

Inflation CPI
(Hussain, M. Haider and Ahmed, Qazi Masood, Black Economy of Pakistan Case Study, Oct 06

Tax Evasion
(M.Ali Kemal,PIDE Working Paper, 2 2007) Salman Aslam, The Pakistan Development 4 Review, Winter 1998

Unemployment
(Salman Aslam, The Pakistan Development Review, Winter 4 1998)

Taxation System
(Max Everest-Phillips, WIDER Elites conference 12 3 June 09)

Underground Economy and Corruption

(Salman Aslam, The Pakistan Development Review, Winter 4 1998) & (M.Ali Kemal,PIDE Working Paper, 2 2007)

Awarenes s about Tax Revenue CBR

(Max EverestPhillips, WIDER Elites conference 12 3 June 09)

Income Inequalities
M.Ali Kemal,PIDE Working 2 Paper, 2007) Salman Aslam, The Pakistan Development Review, Winter 4 1998

Tax Audits
(Max Everest-Phillips, WIDER Elites conference 12 3 June 09)

Tax Evasion Impact of Progressive Taxation; 16 3.4.1 Variable Reference List

Aslam, S. (1998). The Pakistan Development Review. Kemal, M. A. (2007). PIDF Wroking PAper. Philips, M. E. (2009, June 12). WIDER Elites Conference. Rubina AKhtar Ahamd, M. R. (2008, December). International Studies Program.

2 3 1

3.4.2 Theoretical Justification of variables under consideration Theoretically, all the above mentioned variables have not only shown statistically significant relationship but their effects have been proven practically. Underground Economy, corruption, Tax Morale, if low, awareness about tax revenue, unemployment, inflation and tax avoidance all trigger tax evasion. However on the contrary progressive taxation is expected to decrease tax evasion. All these variables have influenced the economy at macro level and their significance to each other and to the tax structure as a whole is undoubtable.

3.5 3.5.1

Information gathering and sampling procedures Data sources

I have used Pakistan governmental data from these sources majorly: CBR i.e. Central board of Revenue Economic Surveys of Pakistan

Tax Evasion Impact of Progressive Taxation; 17 3.5.2 Data reliability and internal consistency

`As the data retrieved is from government sources its is reliable, however as in our country data manipulation, dismemberment of facts exists widely so it is anticipated that the figures and facts are can be biased and intentionally manipulated. The consistency of the data thus accordingly varies for tax evasions etc.

3.5.3

Missing data

The data is missing for the following dates for variables i.e. Income Tax & Wealth Tax: Year 2008-2009

Also, some variables didnt have any sort of quantifiable data such as Tax audits, Taxation systems, income inequalities, tax morale, and awareness about tax system and tax avoidance.

3.6

Data Analysis Tools and Techniques

To determine the influence of the independent variables on the dependent variable, both multiple and simple regressions are being used. Regression equations are being developed and its estimates are later utilized to analyze and determine the variables. In the first step, simple regression is used i.e. X & Y and later multiple regression is being run i.e. k Xs and Y. Finally the best fit model is being determined.

Tax Evasion Impact of Progressive Taxation; 18 Chapter 4: 4.1 ESTIMATION & ANALYSIS & CONCLUSION

Results of Statistical Techniques Impact of Progressive Taxation on Tax Evasion: Standard Error
0.0574275

Variable Direct Taxes Equation

Estimate
0.041664

T-Statistics
0.725506

P-Value
0.4888

R-Sq
6.17 %

Tax Evasion = -16.5036 + 0.041664*Direct Taxes

Impact of Wealth Taxes: Standard Error

7.54611

Variable Wealth Taxes Equation

Estimate
8.79671

T-Statistics
1.16573

P-Value
0.2819

R-Sq
16.25 %

Tax Evasion = -14.8528 + 8.79671*Wealth Tax

Impact of Income Tax: Standard Error

0.08708074

Variable Income Taxes Equation

Estimate
-0.0290481

T-Statistics
-0.333577

P-Value
0.7485

R-Sq
1.564%

Tax Evasion = -4.43568 - 0.0290481*Income Tax

Impact of Inflation on Tax Evasion Standard Error

1.23749

Variable Inflation Equation

Estimate
1.49156

T-Statistics
1.20531

P-Value
0.2625

R-Sq
15.3688%

Tax Evasion = -18.5087 + 1.49156*Inflation

Impact of Underground Economy on Tax Evasion Standard Error

0.0318359

Variable Underground Economy Equation

Estimate
-0.0421627

T-Statistics
-1.32437

P-Value
0.2427

R-Sq
25.9694%

Tax Evasion = 43.0845 - 0.0421627*Underground Economy

Tax Evasion Impact of Progressive Taxation; 19 Impact of Unemployment on Tax Evasion Standard Error
0.000002199

Variable Unemployment Equation 4.2

Estimate
-0.00000029

T-Statistics
-1.32437

P-Value
0.2372

R-Sq
26.4918%

Tax Evasion = 296.779 - 0.00000295294*Unemployment

Analysis of Findings Normally when Direct Taxes are increased the Tax Evasion is decreased. Although the above line is not supporting the above statement, yet we can conclude that the Increase in Direct Taxes will decrease the Tax Evasion. We can see in the above table that when Direct Tax is increased constantly the tax evasion is decreased. The regression line and analysis stated above is not supporting the face because Tax evasion is negative in most of the years and secondly there are certain limitations while running this analysis in the form of NonAvailability of Data and Time Constraints.

Normally when Wealth Taxes are increased the Tax Evasion is decreased. Although the above line is not supporting the above statement, yet we can conclude that the Increase in wealth Taxes will decrease the Tax Evasion. The regression line and analysis stated above is not supporting the face because Tax evasion is negative in most of the years and secondly there are certain limitations while running this analysis in the form of Non-Availability of Data and Time Constraints.

Normally when Income Taxes are increased the Tax Evasion is decreased. Although the above line is not supporting the above statement, yet we can conclude that the Increase in Income Taxes will decrease the Tax Evasion. The regression line and analysis stated above is not supporting the face because Tax evasion is negative in most of the years and secondly

Tax Evasion Impact of Progressive Taxation; 20 there are certain limitations while running this analysis in the form of Non-Availability of Data and Time Constraints. The regression for inflation line is showing that when the Inflation Increases, it directly affects the Tax Evasion. The line has a positive slope indicating the direct relationship. Although the Correlation Coefficient and R Square value and the P value are all indicating that the relationship isnt strong but in practicality these two variables go hand in hand. The Reason for the results of Correlation Coefficient, R Square and P value from the practical life is mainly due to the Negative Tax Evasion (collecting more than the target tax revenue) and certain limitations like Non-Availability of Data and Time Constraints. The Regression Line for underground economy shows that the Tax Evasion and Underground Economy are inversely related but in practical it is not correct. The underground economy is the core determinant of Tax Evasion and greater the underground economy the greater the Tax Evasion. The statistical results are contrary to the practicality due to certain limitation of this research paper like non availability of accurate data and time constraint. Moreover Underground economy cannot be measured or have any exact value because it doesnt have any registered documentation. The Values of Underground Economy used in this paper are of the work done by M.Ali Kemal PIDE Working Paper, 2007

The Regression Line shows that the Tax Evasion and Unemployment are inversely related but in practical it is not correct. The Unemployment do have a positive relation with Tax Evasion. As the unemployment increases, the income decreases and making the Net Tax base smaller. Consequently the Tax Evasion will be increased. The statistical results shown in this paper are not appropriate as of several reasons like Non availability of reliable data and time constraints.

Tax Evasion Impact of Progressive Taxation; 21

As tax system is a non quantifiable data, there wont be any regression analysis for this. Tax system is one of the important variables that can affect Tax Evasion directly. The recent example of better Tax System affecting the Tax Evasion is the constant increase in the Tax Collection by Central Board Of Revenue. For the last five years CBR has managed to achieve the target tax collection and not only target but has also surpassed that. This is done through better taxation system and creating awareness among the people about the benefits of Tax revenue.

Similar to Tax System, Tax Audit is also a qualitative variable and no such secondary data is available on it. However it does have significance on Tax Evasion. due to the non Availability we cannot run regression analysis on this variable.

4.3

Limitations of the Study A lot of essential data could not be collected due to time constraints. Also numerous variables were outlined in the theoretical framework, only few could be tested eventually due to unavailability of statistical data .

The authenticity of secondary data cannot be guaranteed as this information largely depends on the need for which it was initially collected.

Moreover when conducting the research the units of measurement used were different, as a result of which the results obtained cannot be fully declared reliable and replicable.

4.4

Conclusion

Taking into account the above findings and analysis we do the following:

Tax Evasion Impact of Progressive Taxation; 22 W reject the Null Hypothesis (Ho) stated before and accept the Alternative hypothesis (H1) that Progressive Taxation (Direct Tax) do have significance with Tax Evasion. We reject the Null Hypothesis (Ho) stated before and accept the Alternative hypothesis (H1) that Progressive Taxation (Wealth Tax) do have significance with Tax Evasion We also reject the Null Hypothesis (Ho) stated before and accept the Alternative hypothesis (H1) that Progressive Taxation (Income Tax) do have significance with Tax Evasion. We reject the Null Hypothesis (Ho) stated before and accept the Alternative hypothesis (H1) that Inflation do have significance with Tax Evasion. Though we accept the alternative hypothesis that Tax System do have significant impact of Tax Evasion. Keeping in view the importance and practicality of Tax Audits, we reject Null Hypothesis and accept alternative and conclude that the Tax Audits have significant impact on Tax Evasion.

Tax Evasion Impact of Progressive Taxation; 23 REFERNCES

Aslam, S. (1998). The Pakistan Development Review. Bartels, L. M. Department of Politics and Woodrow Wilson School of Public and International Affairs, Princeton University. Growth and Investment, Economic Survey 2008-09. Haq, H. B. Finance Bill 2009. HUSAIN, D. I. Pakistans Economic Future. Income tax Rules 2002, GOVERNMENT OF PAKISTAN FEDERAL BOARD OF REVENUE (REVENUE DIVISION). Kemal, M. A. (2007). PIDF Wroking PAper. P., B. N. Faculty of Business, University of Botswana, Gaborone, Botswana. Journal of Accounting and Taxation Vol.1 (1), pp. 008-022, April, 2009. Philips, M. E. (2009, June 12). WIDER Elites Conference. Rubina AKhtar Ahamd, M. R. (2008, December). International Studies Program. Sabir, H. A.-P. Why Tax to GDP has Fallen?

Saeed, N. Impact of Globalization On Pakistan's Economy, Department of Economics, Bahauddin Zakariya University, Multan.

Tax Evasion Impact of Progressive Taxation; i

APPENDIX 1: Data Sheet

(Rs. Billion) Years
1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 112 124 142 148 165 177 224 333 408 496

Direct Taxes
5 14 10

Tax Evasion

-57 -10 -11 -22 -12 -7 22

Years 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

Wealth Taxes 3 1 0.4 0.2 0.1 0.03 0.14 0.047 0.048

Tax Evasion 5 14 10 -57 -10 -11 -22 -12 -7

Tax Evasion Impact of Progressive Taxation; ii (Rs.Billion)

Years 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Income Taxes 105 117 136 145 157 173 209 315 367 Tax Evasion 5 14 10 -57 -10 -11 -22 -12 -7

Years 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

Inflation CPI (% Change) 3.6 4.4 3.5 3.1 4.6 9.3 7.9 7.8 12

Tax Evasion (in Rs. Billion) 5 14 10 -57 -10 -11 -22 -12 -7

Tax Evasion Impact of Progressive Taxation; iii

Years 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006
Underground Economy (in Rs. Billion) 2 Tax Evasion (in Rs. Billion)

836 975 1,158 1,291 1,421 1,481 1,675

5 14 10 -57 -10 -11 -22

Years 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006

Unemployment

Tax Evasion (in Rs. Billion)

97,570,000 100,080,000 102,000,153 104,652,409 106,018,764 108,841,263 108,402,000

5 14 10 -57 -10 -11 -22

M.Ali Kemal PIDE Working Paper, 2007

Tax Evasion Impact of Progressive Taxation; iv APPENDIX 2: Regression Analysis

Regression Analysis - Linear model: Y = a + b*X ----------------------------------------------------------------------------Dependent variable: Tax Evasion Independent variable: Direct Taxes ----------------------------------------------------------------------------Standard Parameter Estimate Error T Statistic P-Value

----------------------------------------------------------------------------Intercept Slope -16.5036 0.041664 15.2165 0.0574275 -1.08458 0.725506 0.3097 0.4888

-----------------------------------------------------------------------------

Analysis of Variance ----------------------------------------------------------------------------Source Sum of Squares Df Mean Square F-Ratio P-Value

----------------------------------------------------------------------------Model Residual 277.157 4212.44 1 8 277.157 526.555 0.53 0.4888

----------------------------------------------------------------------------Total (Corr.) 4489.6 9

Correlation Coefficient = 0.248462 R-squared = 6.17332 percent Standard Error of Est. = 22.9468

Tax Evasion Impact of Progressive Taxation; v

The StatAdvisor --------------The output shows the results of fitting a linear model to describe the relationship between Tax Evasion and Direct Taxes. The equation of the fitted model is

Tax Evasion = -16.5036 + 0.041664*Direct Taxes

Since the P-value in the ANOVA table is greater or equal to 0.10, there is not a statistically significant relationship between Tax Evasion and Direct Taxes at the 90% or higher confidence level.

The R-Squared statistic indicates that the model as fitted explains 6.17332% of the variability in Tax Evasion. The correlation coefficient equals 0.248462, indicating a relatively weak relationship between the variables.

Tax Evasion Impact of Progressive Taxation; vi

Regression Line Analysis:

Regression Analysis - Linear model: Y = a + b*X ----------------------------------------------------------------------------Dependent variable: Tax Evasion Independent variable: Wealth Tax ----------------------------------------------------------------------------Standard Parameter Estimate Error T Statistic P-Value

----------------------------------------------------------------------------Intercept Slope -14.8528 8.79671 8.04722 7.54611 -1.84571 1.16573 0.1074 0.2819

-----------------------------------------------------------------------------

Analysis of Variance ----------------------------------------------------------------------------Source Sum of Squares Df Mean Square F-Ratio P-Value

----------------------------------------------------------------------------Model Residual 580.055 2987.95 1 7 580.055 426.849 1.36 0.2819

----------------------------------------------------------------------------Total (Corr.) 3568.0 8

Correlation Coefficient = 0.403201 R-squared = 16.2571 percent Standard Error of Est. = 20.6603

Tax Evasion Impact of Progressive Taxation; vii

The StatAdvisor --------------The output shows the results of fitting a linear model to describe the relationship between Tax Evasion and Wealth Tax. The equation of the fitted model is

Tax Evasion = -14.8528 + 8.79671*Wealth Tax

Since the P-value in the ANOVA table is greater or equal to 0.10, there is not a statistically significant relationship between Tax Evasion and Wealth Tax at the 90% or higher confidence level.

The R-Squared statistic indicates that the model as fitted explains 16.2571% of the variability in Tax Evasion. The correlation coefficient equals 0.403201, indicating a relatively weak relationship between the variables.

Tax Evasion Impact of Progressive Taxation; viii

Regression Analysis - Linear model: Y = a + b*X ----------------------------------------------------------------------------Dependent variable: Tax Evasion Independent variable: Income Tax ----------------------------------------------------------------------------Standard Parameter Estimate Error T Statistic P-Value

----------------------------------------------------------------------------Intercept Slope -4.43568 -0.0290481 18.2756 0.0870804 -0.242711 -0.333577 0.8152 0.7485

-----------------------------------------------------------------------------

Analysis of Variance ----------------------------------------------------------------------------Source Sum of Squares Df Mean Square F-Ratio P-Value

----------------------------------------------------------------------------Model Residual 55.8304 3512.17 1 7 55.8304 501.739 0.11 0.7485

----------------------------------------------------------------------------Total (Corr.) 3568.0 8

Correlation Coefficient = -0.12509 R-squared = 1.56475 percent Standard Error of Est. = 22.3995

The StatAdvisor ---------------

Tax Evasion Impact of Progressive Taxation; ix

The output shows the results of fitting a linear model to describe the relationship between Tax Evasion and Income Tax. The equation of the fitted model is

Tax Evasion = -4.43568 - 0.0290481*Income Tax

Since the P-value in the ANOVA table is greater or equal to 0.10, there is not a statistically significant relationship between Tax Evasion and Income Tax at the 90% or higher confidence level.

The R-Squared statistic indicates that the model as fitted explains 1.56475% of the variability in Tax Evasion. The correlation coefficient equals -0.12509, indicating a relatively weak relationship between the variables.

Tax Evasion Impact of Progressive Taxation; x

Regression Analysis - Linear model: Y = a + b*X ----------------------------------------------------------------------------Dependent variable: Tax Evasion Independent variable: Inflation ----------------------------------------------------------------------------Standard Parameter Estimate Error T Statistic P-Value

----------------------------------------------------------------------------Intercept Slope -18.5087 1.49156 11.9106 1.23749 -1.55397 1.20531 0.1588 0.2625

-----------------------------------------------------------------------------

Analysis of Variance ----------------------------------------------------------------------------Source Sum of Squares Df Mean Square F-Ratio P-Value

----------------------------------------------------------------------------Model Residual 689.996 3799.6 1 8 689.996 474.951 1.45 0.2625

----------------------------------------------------------------------------Total (Corr.) 4489.6 9

Correlation Coefficient = 0.39203 R-squared = 15.3688 percent Standard Error of Est. = 21.7934

Tax Evasion Impact of Progressive Taxation; xi

The StatAdvisor --------------The output shows the results of fitting a linear model to describe the relationship between Tax Evasion and Inflation. The equation of the fitted model is

Tax Evasion = -18.5087 + 1.49156*Inflation

Since the P-value in the ANOVA table is greater or equal to 0.10, there is not a statistically significant relationship between Tax Evasion and Inflation at the 90% or higher confidence level.

The R-Squared statistic indicates that the model as fitted explains 15.3688% of the variability in Tax Evasion. The correlation coefficient equals 0.39203, indicating a relatively weak relationship between the variables.

Tax Evasion Impact of Progressive Taxation; xii

Regression Analysis - Linear model: Y = a + b*X ----------------------------------------------------------------------------Dependent variable: Tax Evasion Independent variable: Underground Economy ----------------------------------------------------------------------------Standard Parameter Estimate Error T Statistic P-Value

----------------------------------------------------------------------------Intercept Slope 43.0845 -0.0421627 41.1154 0.0318359 1.04789 -1.32437 0.3427 0.2427

-----------------------------------------------------------------------------

Analysis of Variance ----------------------------------------------------------------------------Source Sum of Squares Df Mean Square F-Ratio P-Value

----------------------------------------------------------------------------Model Residual 923.176 2631.68 1 5 923.176 526.336 1.75 0.2427

----------------------------------------------------------------------------Total (Corr.) 3554.86 6

Correlation Coefficient = -0.509602 R-squared = 25.9694 percent Standard Error of Est. = 22.942

The StatAdvisor

Tax Evasion Impact of Progressive Taxation; xiii

--------------The output shows the results of fitting a linear model to describe the relationship between Tax Evasion and Underground Economy. The equation of the fitted model is

Tax Evasion = 43.0845 - 0.0421627*Underground Economy

Since the P-value in the ANOVA table is greater or equal to 0.10, there is not a statistically significant relationship between Tax Evasion and Underground Economy at the 90% or higher confidence level.

The R-Squared statistic indicates that the model as fitted explains 25.9694% of the variability in Tax Evasion. The correlation coefficient equals -0.509602, indicating a moderately strong relationship between the variables.

Tax Evasion Impact of Progressive Taxation; xiv

Regression Analysis - Linear model: Y = a + b*X ----------------------------------------------------------------------------Dependent variable: Tax Evasion Independent variable: Unemployment ----------------------------------------------------------------------------Standard T Parameter Estimate Error Statistic P-Value ----------------------------------------------------------------------------Intercept 296.779 228.805 1.29708 0.2512 Slope -0.00000295294 0.00000219979 -1.34237 0.2372 -----------------------------------------------------------------------------

Analysis of Variance ----------------------------------------------------------------------------Source Sum of Squares Df Mean Square F-Ratio P-Value ----------------------------------------------------------------------------Model 941.744 1 941.744 1.80 0.2372 Residual 2613.11 5 522.623 ----------------------------------------------------------------------------Total (Corr.) 3554.86 6 Correlation Coefficient = -0.514701 R-squared = 26.4918 percent Standard Error of Est. = 22.8609

The StatAdvisor --------------The output shows the results of fitting a linear model to describe the relationship between Tax Evasion and Unemployment. The equation of the fitted model is Tax Evasion = 296.779 - 0.00000295294*Unemployment Since the P-value in the ANOVA table is greater or equal to 0.10, there is not a statistically significant relationship between Tax Evasion and Unemployment at the 90% or higher confidence level. The R-Squared statistic indicates that the model as fitted explains 26.4918% of the variability in Tax Evasion. The correlation coefficient equals -0.514701, indicating a moderately strong relationship between the variables.

Tax Evasion Impact of Progressive Taxation; xv APPENDIX 3: Scatter Plots