Redistributive Effect of Personal Income Taxation in Pakistan

This paper studies the redistribution effect of personal income tax in Pakistan. We decompose the overall tax system in order to evaluate the contribution of rate, allowances, deductions, exemptions and credits. The structure given in Income Tax Ordinance 2001 is applied to gross household incomes in 2002 (low growth year) and 2005 (high growth year). Our findings reveal that the reforms laid down in this Ordinance resulted in a greater redistribution of incomes. The redistributive effect increases as we move from 2002 to 2005 tax assessment. Deductions for salaried tax payers contribute the most towards progressivity. This is different from countries with advanced taxation systems relying mainly on allowances followed by tax rate and exemptions.