Mazhar Waseem

The personal income tax system in Pakistan, based on discontinuities in average tax rates (notches) rather than marginal tax rates (kinks), may be inefficient, finds new IGC research by Henrik Kleven (LSE) and Mazhar Waseem (LSE). Using administrative data, the authors examine the responses of taxpayers to a complex and often confusing tax system, and find that taxpayers, in the neighbourhood of notches, reduce their reported earnings to lower their tax liability. They also find that taxpayers manipulate the composition of their reported income to categorise themselves as “wage earners”, which receives lighter taxation. This research has contributed to the recent decision by the Finance Ministry of Pakistan to replace the notch-based tax schedule with a kink-based one and to rationalise tax rates for wage-earners and self-employed individuals to reduce the disparity between the two.