WASHINGTON DIARY: Tax troubles (comment on IMF loan)
by Dr Manzur Ejaz, USA

November 25th, 2008
Courtesy and thanks: Wichaar.com
There is no way out of our perpetual economic crisis without enforceable progressive taxation. It is not possible for Pakistan to avoid such crises when the taxable don’t pay up and those eligible for state handouts foot the bill.

It is often the case that, late into a dinner party here in Pakistan, someone asks me: “What is the solution to Pakistan’s economic crisis?” My blunt answer is that Pakistan’s economic crisis would be solved if only the rich start paying taxes. At this point, the affluent guests and hosts give me the cold shoulder and change the topic.

I have been saying the same thing to my prosperous American friends who were all praise for the Bush tax cuts, but are now paying attention to my wacky economic prescriptions.

Pakistan has been in a constant state of economic crisis, except for the periods when foreign aid was abundant. As soon as funds from abroad stop flowing, the country goes back to it’s crisis state. The tenures of Generals Zia-ul Haq and Musharraf were relatively stable economically because of the large influx of American financial assistance, first for the Afghan Jihad and then to finish off the job post-9/11.

It does not matter if the ruler comes in through a coup or an election, Pakistan survives on foreign aid. Before 9/11, the economic performance of General Musharraf’s regime was worse than Nawaz Sharif’s second term, but what happened after 9/11 is history not worth repeating.

Somehow, foreign assistance dries up when civilian governments are ushered in, possibly because non-democratic regimes are only discredited when economic woes become unmanageable. Further, non-democratic forces see no gain in hanging on to a country that is getting closer to default and spinning out of control.

Whatever the etiology of economic crisis, it is evident that Pakistan is a perpetual fiscal deficit country. Its collection of revenues always falls short of its expenditures, and the gap is always filled with borrowing, or through compensation for fighting proxy wars, usually for the US. The causes of deficit are never addressed because that would go against the interests of the ruling elites.

In Pakistan, most of the revenues are collected through indirect taxation, regressive by its very nature. It means that, ultimately, the poor and the faltering middle class pay a much higher proportion of their income in taxes than do the wealthy. For example, if a tax of Rs 40 is levied on a litre of petrol, it takes a larger bite out of the income of a lower or middle class citizen (in direct consumption or transportation fares).

Since most indirect taxation is levied on necessary and essential goods, people with modest incomes table most of the tax bill. Further, this accelerates the process of accumulation of wealth in the hands of high income groups that do not share the tax burden. Eventually, a rising proportion of the country’s wealth goes out of the tax net, increasing the deficit.

There are several indicators that reflect the accumulation of unprecedented amounts of wealth in the last few decades by the upper ten to fifteen percent of Pakistanis. The booming consumer markets have been filling the coffers of the expanding merchant classes. In short, most of the wealth is concentrated in the top 20 percent, and yet this is the section that either does not pay taxes or contributes a nominal amount to the treasury.

Successive governments have half-heartedly tried to expand the tax net with no success. The political elites, who are mostly from the non-tax-paying wealthy classes, do not volunteer to tax themselves. Further, the urban business organisations have opposed taxation with state-paralysing tactics that governments had to back off.

Consequently, we are in yet another economic crisis.

The IMF and other world donors are well aware of the situation. However, since they know about the Pakistani state’s incapacity to collect taxes from the wealth-holding classes, they pressure the government to expand indirect taxation. Their demand that Pakistan eliminate subsidies on essential goods is a farce. What difference does it make if you take back the subsidy on petrol when the state charges about Rs 40 as tax per litre? Essentially, it was providing a ‘subsidy’ and then taking it back in the form of tax!

Nevertheless, the IMF always asks Pakistan to eliminate subsidies, but not reduce indirect taxes. Simply, the IMF pushes for higher indirect taxes to bridge the deficit, and its programmes turn out to be anti-poor even when they are not intended to be.

Some economists believe that Pakistan’s high-income groups are justified in not paying taxes because the state does not provide adequate services and wastes taxes. The state’s unaccountability on spending is a real problem, but maybe it is so because powerful sections of society do not pay taxes. For example, when, in the past, children of influential people used to attend public schools, the standards of these institutions was much higher than is the case at the moment, when education is stratified according to income groups. If the rich and powerful pay taxes, they will be in a position to hold the state accountable for what it does with their tax money.
Courtesy and thanks: wichaar.com
http://www.wichaar.com/news/296/ARTICLE/10176/2008-11-25.html

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