In praise of informal economy

Two headlines on the front page of Business Recorder (January 2, 2016) were chicken soup for the soul of this Shakespearean fool. First dollop: “SBP regulations for the debt-property swap”. Delicious. Good to know our banks also moonshine as pawn shops – money for your valuables. Clearly, no mandate-creep on the part of SBP if there is little to distinguish a bank from a pawn shop. Meanwhile, commiserations are due to the other regulator, SECP, as it sees the whole concept of limited liability, enshrined in the laws that it enforces, disdainfully swept away.

The other headline is even more succulent. The Prime Minister ‘launched’ the VTCS – voluntary tax compliance scheme. Love the bit about ‘voluntary compliance’. The FBR definitely cannot be accused of not having a sense of humour. Unless they mean it, like the alms seeking sadhu ‘bless him who pays (taxes), bless him too who does not’. FBR’s track record suggests they do mean it. Good news.

The omnipresent, omnidirectional, Q block plenipotentiary is passionate about the documentation of the economy, the only way to square the abominable tax to GDP circle. But we are glad, unlike the FBR, he doesn’t mean it. How else do you explain the persistent addition to levies and rates. Add to it an amputated enforcement arm and even the saints, of which we have not many, will head to the tavern. Far from the maddening crowd, they would rather have their sins ‘withheld’ than atoned for. Once the toxicity of amnesty brew wears off, as it surely will, there will be even fewer filers, leaving the faithful to bear the burden of the sinners.

This is not an unintended consequence. It is the natural outcome of an atrophied tax administration driven by targets, not realistic forecasts based on revenue potential. More crook than hook gets applied when you have to meet targets made in heaven and not grounded in growth and profits. Output gets confused for outcome. The former is a numbers game, with a tithe for the taxman, and unencumbered by any regard for due refunds or adjustments; the latter path to growth – investments and jobs and competitive costs of production.

Of course, the government needs money. To run itself, secure against internal and external threats, provide justice. And it needs its own (tax) money, not borrowed or gifted or by selling assets. The question is how its spending stacks up in terms of efficiency and public welfare.

After the 18th Amendment the naïve amongst us thought Islamabad will be full of vacant properties – the secretariat, the ‘babu para’. Better candidates for sale than shares in profit making state enterprises. Hallelujah, we see new construction to house the government! We are proud of our khakis and whites and blues, and accept the priority to defence, but can the defence budget be made a tad more transparent. We recognise the importance of the Public Sector Development Programme that provides impetus to private sector investments, but when was the last time the Planning Commission carried out a post facto cost-benefit analysis of its ‘schemes’; an impact evaluation. Hard to give the government a passing grade when it comes to an efficient use of resources. In comparison, the informal economy gives a greater bang for the buck.

On the welfare front the informal economy leaves the government even further behind. Against all odds, it does keep the economy chugging. It has had a far more salient role in controlling the incidence of poverty. It has created more jobs (unrecorded) than the formal sector, and along with the extraneous factors, helped in keeping inflation in check which would have ballooned had all the taxes been added to the price list. It has funded several educational and health facilities for the less advantaged. It has helped set up ‘soup kitchens’ that are a model of discipline and efficient management. In social protection the informal sector makes the government look like a marathon runner in a sprint event. And lest we should forget, there is a thin line between not-for-profit enterprises and informal economy: they have common source of (untaxed) funds.

Something is surely amiss with our tax system when we rank so high in philanthropy but so low in tax compliance; when the gap between top 10% and the bottom 90% continues to grow rapidly; when a two speed economy, with Punjab galloping away (and why not), challenges the social contract; when amnesties are numerous but prison sentences (for evasion) none. We have fewer listed companies today than we did five years ago. Should we eulogise the remarkable fact that we have more tax payers than filers, or elegise the complexities of the system.

The world has moved on since the days of Cardinal Wolsey but even his policy of taxing income at 5% but topping up through ‘benevolences’ (forced ‘loans’ from the wealthy) provided respite to the poor at the cost of the rich.

There are only three ways that our fractured tax regime can be made to limp: tax rates that are commensurate with enforcement capacity (either make enforcement happen or lower the rates); a tax policy that is progressive and rooted in equity and egalitarianism (spare the poor, spank the rich. Tax all forms of income, whether from agriculture or real estate or remittance – whatever); and use the tax rupees wisely and efficiently.

Blissfully, for us habituates of the tavern, governments come in fifty shades of grey, but subconsciously promote black. Let us thank all the Q block czars, past and present, for their abiding faith in the immutable law of informal economy: predatory taxes + poor enforcement = less documentation.

May God bless the informal economy.