Governments in developing economies like Pakistan often assume that raising tax rates automatically increases revenue.
This linear arithmetic suggests that there exists an optimal tax rate up to which revenue rises with rate increases.
Beyond that point, however, higher taxes disincentivise productive behaviour, encourage evasion, fuel capital flight, and push economic activity into the informal sector, thus ultimately reducing net revenue. The relationship is therefore quadratic, not linear.
For Pakistan, identifying whether we are operating to the left (where rate hikes still increase revenue) or to the right (where rate hikes shrink the base and reduce revenue) of this peak is a fiscal imperative.
Government-academia partnership could improve tax collection through analysis
