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More growth, more taxes – II

Distributive justice: Distributive justice or economic justice is an important function of tax policy. Economic justice relates largely to distribution of tax burden and benefits of public expenditure. It is a component of the broader concept of social justice, which encompasses, besides distributive justice, such questions as treatment of women and children, and racial and religious tolerance in a society. Tax policy is a democratic method to influence the distribution of income and wealth on desired lines. The main ingredients of this policy can be (a) progressive direct taxation of income, wealth, and property transactions, (b) taxation of commodities (customs duty, excise levy, and sales tax) purchased largely by high-income groups, and (c) subsidies (negative taxation) on goods purchased by low-income groups. In Pakistan we are moving from progressive taxation to regressive taxation, on the dictates of foreign donors. It is a dangerous step that is bound to force us to civil strives, as our society is already divided on economic, geographical and religious divisions.

The primary function of a tax system is to raise revenue for the government for its public expenditure as well as for local authorities and similar public bodies. So the first goal in development strategy as regards taxation policy is to ensure that this function is discharged effectively. The performance of the Pakistani tax managers is highly disappointing as fiscal deficit remained high during the last decade and the revenue targets fixed annually were revised downwards many a times and even then the same could not be achieved. The Tax-GDP ratio remained dismally low.

The second equally important function is: To reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends. In Pakistan there has been a gradual shift from equitable taxes to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive and easily collectable taxes has destroyed the entire philosophy of taxes. This deviation has effectively transferred the burden of taxes from the rich to the poor.

Stabilisation

Initial developmental efforts are generally marked by inflationary tendencies in an economy. Inflation, if uncontrolled, may thwart all development plans and bring misery to the poor. A reasonable degree of price stability should be the primary concern of a government’s economic policies. The overall level of economic activity in an economy depends upon aggregate demand, relative to capacity output. At times, the level of aggregate demand may be insufficient to secure full employment of labor and other factors of production. At other times, aggregate demand may exceed available output at full employment level. Government intervention in both the cases becomes essential to correct such disequilibria in the economy.

The evaluation of our existing tax system with reference to the foregoing objectives is a difficult task because various other policies (like public expenditure policy) may be geared to achieve the same objectives. To what extent the redistributive objective has been served and the extent to which tax policy plays a relative role are difficult questions to answer. Moreover, the various objectives of tax policy may not always work harmoniously. Rather, they are often in conflict with each other if not mutually exclusive. Since the tax system of a country grows out of the interaction between political judgment and economic rationale, the process of compromises and tradeoffs is influenced by political expediency and economic logic, the former, in most cases, having the upper hand. In fact, political requirements and economic thinking change with time, giving new directions to tax policy. As Richard Bird has observed, “Tax reform is, therefore, a never-ending process, not something that can be brought about once and for all and then forgotten.”

Bridging tax gap

A country’s tax gap is measured by the amount of tax that remains uncollected due to non-compliance with tax laws. ‘Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology’ (http://aysps.gsu.edu/isp/files/ispwp0811(1).pdf), a joint study of Federal Board of Revenue (FBR), Andrew Young School of Policy Studies at Georgia State University and World Bank, provides in detail, tax gaps by type of tax and describes the methodologies and data used for such estimates. The report released in December 2008 under the name of Rubina Ather Ahmad (FBR) and Mark Rider (Andrew School) warns that views expressed “are of the authors and not of the Government of Pakistan.” It is shocking that FBR on the dictates of World Bank initiated this study and when final report was released it disassociated itself-this is typical of our government-always non-committal and hesitant to take any responsibility. After disowning this report, in 2013, FBR is still struggling to bridge the large tax gaps which are the direct result of its persistent inefficiency, incompetence and rampant corruption.

For fiscal year 2004-2005, according to this report, Pakistan’s federal tax gap was Rs. 409.5 billion or approximately 69% of actual tax receipts of Rs. 590.4 billion. Terming this as “conservative estimate”, the report claims direct tax gap at Rs. 262.8 billion (around 143% of actual collection of Rs. 183.1 billion) and indirect tax gap at 146.7 billion (36% of actual tax collection of Rs. 407 billion). In 2008, the data selected was for fiscal year 2004-2005 and tax gap was estimated at 45%. Since then tax gap has increased significantly and it can safely be concluded that it is not less that 80% of actual tax collection. This report and many others do not take into account the real tax potential of Pakistan and therefore estimates of tax gaps are under-assessed.

The real tax potential of Pakistan, by a very conservative estimate, is Rs 8,000 billion. However, the target for the current fiscal year at the time of budget announcement was fixed at Rs 2,475 billion. It is now reduced to Rs. 2345 billion but yet FBR is finding it difficult to meet-the shortfall for first nine months is Rs 200 billion!

Who is responsible for the prevailing pathetic state of affairs? Our debt burden is increasing monstrously, fiscal deficit is getting beyond control, inflation is crushing the poor, taxes are being evaded and avoided by the rich and whatsoever little is collected, is mercilessly wasted by those who matter in the land. Debt burden under the present regime has witnessed a rising trend and reached a new high of 70.5% of GDP in the second quarter of 2014 due to a widening budget deficit and fall in tax receipts, according to the latest statistics issued by the State Bank of Pakistan-http://www.sbp.org.pk/ecodata/Profile.pdf. The State Bank in its report stated that financing of fiscal deficit through domestic channels has raised concerns regarding debt sustainability of the economy. A heavy reliance on expensive short-term debt has increased the debt servicing burden of the country. Pakistan has been reeling under a revenue deficit for the past six years, implying that a larger part of public borrowings, which financed the government’s current expenditures, did not add to the repayment capacity of the economy.

In view of the size and magnitude of public debt, a high fiscal deficit is inevitable-our total debt and liabilities have increased to Rs.17.25 trillion, or 70.5%, of GDP, while debt alone stood at Rs 16.2 trillion, or 68% of GDP. Fiscal deficit reached 8.5% of GDP in 2012-13, against the original budget target of 4%, reflecting both revenue and expenditure slippages, including higher subsidies mainly to clear arrears in the power sector – the situation is worsening in the current fiscal year as FBR is facing daunting task of collecting even revised target of Rs. 2345 billion. Collection showed so far by FBR include substantial amounts not due (obtained as advance) and withholding of genuine refunds of billions of rupees. Ishaq Dar while addressing Chief Commissioners’ Conference on April 15, 2014 praised Chairman and his team for growth of 17% in revenue, but never bothered to investigate the allegations of high-handedness in showing “higher” (sic) collection. Dar, an experienced chartered accountant, knows fully well how fudging of figures is being done under his nose. During his previous tenure as Finance Minister as well, Pakistan was found guilty of figure funding and Shaukat Aziz admitted that Pakistan had to pay fine to IMF for such lapses – A history of figure fudging by Dr Pervez Tahir, The Express Tribune, July 28, 2011.

It is a great tragedy that while country is caught in debt trap, the rich and the mighty are not only refusing to pay due taxes, but are also living an emperor-like life at the taxpayers’ expense and on borrowed funds. They are the de facto beneficiaries of the State’s resources-generated mainly by the landless tillers, industrial workers, professionals and white-collared employees. Nawaz Sharif and Dar are busy giving them more tax incentives, immunities and amnesties.

Pakistan is not a poor country – the State’s kitty is empty because of the unwillingness of the rich to pay taxes, collossal wastage of taxpayers’ money on unproductive expenses and non-exploitation of vital natural resources. Absentee landlords (they include mighty generals who have been allotted State lands under one pretext or the other during the last many decades) have been resisting proper personal taxation on their enormous income and wealth. An unholy anti-people alliance of the trio of indomitable civil-military complex, corrupt and inefficient politicians and greedy businessmen – controlling and enjoying at least 90% of the State resources – contribute lower than 2% towards the national revenue collection. This tax gap has not at all been discussed in ‘Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology’, a study which is nothing but an eye wash.

The gigantic and useless government apparatus – doing nothing for public welfare – is also busy wasting whatever taxes are collected. The army of ministers, state ministers, advisers, consultants, high-ranking government servants (sic) is not willing to cut down their perquisites and privileges. They are not ready to live like the common man by surrendering unprecedented perks and privileges they are enjoying at the cost of taxpayers’ money. For their luxurious life they are burdening the poor, property-less masses with more and more taxes. Time and again we have made a case for monetizing all perks and perquisites and right-sizing of government departments and corporations, but civil-military complex and their cronies in politics are not ready for such reforms.

The existing exploitative, rotten, regressive, ill-directed and unfair tax system is widening the existing gulf between the rich and the poor – leading to gang wars, crimes, commotions and breakdown of the entire society. The sole emphasis on regressive indirect taxes [even under the garb of income taxation through presumptive and minimum tax regimes on goods and services] without evaluating their impact on the economy and lives of the poor masses and lack of political will to tax the rich and mighty, is the real dilemma of our State – not scarcity of resources or narrow tax base (nearly sixty million active mobile users are paying exorbitant sales tax at 19.5% and 15% income tax). Equity demands higher taxes from those who have higher income and wealth, but in Pakistan since 1991 all tax policies have been aimed at decreasing tax burden on the rich but increasing its incidence on the poor.

(To be continued)

Huzaima Bukhari and Dr Ikramul Haq, "More growth, more taxes – II," Business recorder. 2014-04-19.
Keywords: Economics , Economic issues , Economic policy , Economic system , Economic growth , Economic planning , Tax policy , Tax reform , Economy-Pakistan , Taxation , FBR