THE NEXUS BETWEEN ECONOMIC GROWTH, INVESTMENT AND TAXES: EMPIRICAL EVIDENCE FROM PAKISTAN

In this study we empirically test the impact of taxes, inflation and bank loans on investment and economic growth using a time series model for Pakistan economy. We applied OLS on stationary data of growth model, while used Johansen’s co-integration methodology for investment mode and find that the taxes do not pose statistically significant effect on economic growth directly; rather the negative impact is seen through the investment channel. Inflation hampers growth and investment whereas bank loans to private sector have affected the private investment positively with very small magnitude due to effective utilization of the loans. We also find that higher income taxes impede growth and result the low investment due to the saving channel. It is suggested that government should lower the taxes on capital stock and the channel of loans to private sector for investment purposes should be effective with proper monitoring of the loans.