This article explores the effects of taxation system of Pakistan, especially indirect taxes, on the distribution of wealth between the rich and poor. The purpose is to determine the tax burden and the resultant income disparities focusing on the poor segment of the society. Pakistan’s taxation system emerged from the ashes of British colonial rule and so it absorbed exploitative and iniquitous tendencies. With a large population living below the taxable threshold, reliance of the government to use indirect taxation as a mean to raise the tax to GDP ratio reduces the welfare dividend and compounds income inequality. This produces a cyclic process of economic inefficiencies and distortions which inadvertently widens the socio-economic gap. This article also proposes a Tax Revenue Strategy to policy planners to mitigate the effects of negative economic distortions arising out of weak taxation structure to reduce income inequalities.
Direct and Indirect Taxes, Vertical and Horizontal Equity, Progressive, Regressive, Distortions