Answer to Question #176349 in Microeconomics for Saqib Imran

Question

How can government of Pakistan distribute the burden of a payroll tax? Explain your answer

with reference to some case study. (Hint: You can consult chapter # 6).

Answer 1

Pakistan's current taxation system is governed by the 2001 Income Tax Ordinance (for direct taxes) and the 1990 Sales Tax Act (for indirect taxes) and is administered by the Federal Tax Service (FBR).

Taxes are an important source of revenue for the government. However, taxes decrease both supply and demand in the market, because buyers have to pay a higher price and sellers receive a lower price for their product. Sometimes the government tries to divide the burden of the tax, such as the federal government does with the payroll tax, requiring both employer and employee to pay ½ of the tax which is 15.3% of wages paid.