It has been argued in the literature that. capital formationis the key to economic development. Apart from expansion in productivecapacity, capital formation is also a source of embodied technicalchange and progressive modernization. Although aid could be a source ofcapital formation, it is undependable and inconsistent with the phrasethat capital is made at home [Nurkse (1953)]. Agriculture, being asector of major proportions in developing countries holds a pivotalposition as a major contributor to capital formation. In the earlystages of economic deVelopment, it must fund industrialization, financecapital imports and act as a ready market for industrial goods. It may,however, be remembered that agricUlture can play this role only withincertain limits and that excessive resource transfers from agricUlturecan prove to be self-defeating and must be avoided [Timmer (1988)]. Whathas been the role of Pakistan’s agriculture in this respect, is acontroversial issue. There are studies [Hamid (1970); Khan (1985) andQureshi (1987)] that hold that agriculture’s role in capital formationin Pakistan has, at best, been dismal. Others [Chaudhry (1973);Government of Pakistan (1986, 1988)] have argued that agriculture inPakistan was heavily taxed and made significant contributions toeconomic de,:elopment. The controversy arises as the former set ofstudies dealt with direct taxes alone as against the coverage of localand indirect taxes and taxes implicit in price and exchange ratepolicies in the latter.