Taxes and impact on aggregate demand

Taxes are indispensable for the functioning of a state as it provides essential services and acts as a source of provision of necessary public goods. State power also manifests itself through taxes. Therefore, the state should extract and collect taxes from all social classes. However, it is relative easier to collect taxes from the masses while powerful lobbies and groups get away with them. The tax base plays a significant role in collecting taxes. If the tax base is broad, tax rate will fall. On the other hand, a thin tax base compels the government to increase the tax rate. Since the tax base is slim, the government is bound to increase tax rates in Pakistan. In addition, the tax-to-GDP (gross domestic product) ratio has been hovering around 9% since long.