One is probably familiar with an inspirational slogan of the American Revolution: “No taxation without representation”, originating in the 1750s and 1760s, which meant that the British imposition of taxes on its American colonies was unacceptable without the expressed will of the people.
In Pakistan, an arguably perverse view of this American proclamation has been in vogue historically. No taxation with representation means that rich Pakistanis, including a significant percentage of national and provincial legislators among others, do not pay taxes, forcing the government to rely primarily on foreign assistance to prop up finances.
US Secretary of State Hillary Clinton has said that Pakistan must tax its elite if it wants to continue receiving financial assistance. “This is one of my pet peeves. Countries that will not tax their elite, who expect us to come in and help them serve their people are just not going to get the kind of help from us that historically they may have. Pakistan cannot have a tax rate of nine percent of the GDP when landowners and all the other elites do not pay anything or pay so little it’s laughable. And then when there’s a problem, everybody expects the US and others to come in and help,” Clinton said to a local audience. The British Prime Minister David Cameron pressed the point home, saying aid increases were a hard sell when, “Too many of your richest people are getting away without paying much tax at all and that’s not fair.” Clinton and Cameron live in societies where to quote Benjamin Franklin, “The only things certain in life are death and taxes.”
Pakistan’s heavy dependence on foreign assistance affects national sovereignty. It has caused an unsustainable debt to GDP ratio of 30 percent to develop, with debt servicing and principal repayments becoming a significant drag on economic growth. The country’s tax-to-GDP ratio of nine percent is one of the lowest in the world. Normally, low-income countries have tax-to-GDP ratios of fifteen percent to eighteen percent. Middle-income countries have tax-to-GDP ratios ranging from 22 percent to 25 percent, and the tax-to-GDP ratio in high-income countries is around 40 percent. Clearly, the Pakistan tax-to-GDP ratio needs to increase to augment revenues that are required to finance the country’s chronic budgetary imbalances. This does not necessarily mean levying higher or punitive taxes, which can stifle growth, but through fighting tax evasion and making tax collection more efficient.
Equitable taxation is particularly important in a country where the rich-poor disconnect has been increasing overall. A 2010 study estimated that 32 percent of Pakistan’s population of 180 million subsists below the poverty line. According to the Human Development Index, 60.3 percent live on under $ 2 a day. One consequence of the yawning rich-poor gap is that it is filled and exploited by extremists.
Pakistan’s rich have historically paid little of their share in taxes. It has been estimated that the landowning classes in Pakistan have been evading taxes to the tune of over $ 1.2 billion a year. While the number of national lawmakers from feudal families represented in the country’s ‘feudal’ democracy appears to be shrinking primarily due to increased urbanisation, their financial influence seems undiminished. The average worth of Pakistani members of parliament is $ 900,000, with its richest member topping $ 37 million, according to a recent study by the Pakistan Institute of Legislative Development and Transparency in Islamabad.
There are periodic reports in the media that give an impression that certain politicians, their wives and dependent children have amassed huge assets, which require due scrutiny by the tax authorities, who alone have the expertise to clarify the impression in the public interest. These reports suggest that these assets subjected to scrutiny by various tax jurisdictions are highly understated. There is a need for a correct valuation of the amassed assets of politicians, as in its absence, the tax burden on existing taxpayers is unfairly increased. Since the politicians are rich themselves, and happily evading taxes, there is very little will to change the system. The Pakistani taxation system has been described as “a system of the elite, by the elite and for the elite. It is a skewed system in which the poor man subsidises the rich man.”
Clearly, exempting agriculture from taxation imposes a heavy burden on the rest of the economy as well as serving as a significant loss of revenue for the budget. Tax exemptions given on agriculture income and the agriculture sector have become a legal, and sometimes illegal, tax shelter for other forms of income. To avoid income taxes, transfers from other sectors of the economy to agriculture are commonplace. The low per capita income in Pakistan reflects unequal distribution of income and high unemployment. Indirect taxes such as those levied on petroleum products have an adverse effect in a country where there is an unequal distribution of income. Therefore, in the case of Pakistan, the direct tax base should be increased rather than indirect as there is more income inequality in Pakistan. It would certainly be helpful if external aid providers use their leverage with the Pakistan government to insist that hitherto untaxed or under-taxed sectors be brought under the tax net.
An equitable national tax policy requires that everyone and every sector with a potential tax liability tax should be taxed. A tax must be perceived as fair and universal. Those who have little should pay little, but they should pay something — anything that displays a commitment to the nation and its goals. The politically and economically powerful elite must justify its stake in society by carrying its share of the tax burden. It is time as well to suggest that no one is entitled to the fruits of someone else’s labour. And if the populace wants the benefits of representation, it should display an interest in taxation.
The writer can be reached at shgcci@gmail.com
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