Tax amnesty, but where’s the vision?

18 Jan 2016


The writer has remained caretaker finance minister of Sindh and is a former chairman of the Sindh Revenue Board.
The writer has remained caretaker finance minister of Sindh and is a former chairman of the Sindh Revenue Board.

PAKISTAN’S struggle with its black economy continues. Another tax amnesty scheme for traders has been introduced. Parliamentary opposition will oppose the tax amnesty offered by the government as a knee-jerk reaction but actually the real crisis lies here. The opposition, be it the right-wing PTI or the left-wing PPP, is not articulating any effective alternative to governmental policy.

The lack of an effective alternative economic vision is worrying because democracy is about socio-economic alternatives. If economic change is not promised by elections, then other forces can either hijack the debate or, as is currently the case in Pakistan, trump the more important economic debate by introducing debates like religion and geo-strategy which have minimal impact on the lives of ordinary people.

Traditionally, left-wing parties are supposed to be in favour of taxing and spending because they focus on economic inequalities. However, poverty rather than economic inequality has emerged as the key socio-economic factor responsible for human misery, and globally states which have prioritised it over social inequalities have gained stronger socio-economic dividends.

The lack of an effective alternative economic vision is worrying.

Unfortunately, attacking entrenched poverty has not generally been politically fashionable in emerging democracies because people living in heartrending conditions dictated by incomes of less than a dollar a day are less likely to have a political voice. Such children of a lesser god are also unlikely to be key participants in the political mobilisation that is required by the political elites in these countries. But poverty has a powerful negative social impact: most countries that have poverty have rapacious and corrupt upper, middle and lower classes, which are driven by insecurity engendered by the fear of sinking into the visible poverty around them.

As poverty grows or becomes more visible, this insecurity promotes migration from the country, flight of capital and destroys the governance structure in the country. Such countries also tend to have low tax-to-GDP ratios and are unable to generate revenues to run the government, and consequentially, black economies tend to be rife. If all this appears familiar to you then you are living in a country afflicted by entrenched poverty.

So how do political oppositions in such countries come up with alternative tax policies that can contribute to governance and enable them to attack poverty? As a matter of fact, the decline of socialism during the late 1980s in emerging economies like China was partly due to the socialist parties’ ‘take and spend’ policy being able to address inequalities but not being able to reach and eliminate entrenched poverty.

While poverty indicators vary, there is some consensus that global poverty was actually halved between 1990 and 2010; with China leading the way. During the period China is estimated to have pulled out almost 700 million people from poverty and reduced its poverty rate from nearly 84pc to around 13pc. The one single economic factor that appeared to be inextricably linked to the reduction in poverty in emerging economies was growth. Average growth rates in emerging economies of around 4.3pc prior to the year 2000 rose to around 6pc during the following 10-year period. In China, growth remained well ahead of this average. Global poverty is, as a consequence, now bigger as an issue in South Asia and Africa where stagnant governance and lack of economic vision remain its allies.

If the opposition parties were to strive for a seismic shift they should be looking at presenting the economic alternative of a growth-led economy. For this, the tax policy should be of reducing direct tax to a minimal level over a graduated period of five years. Perhaps down to less than 3-5pc over a five-year period with stronger tax credits for payers who enter into the scheme in year one or who already pay high tax. In other words, the benefit of reduced taxation would go to the good payers and to those who join early — it will be the opposite of a tax amnesty; the earlier a taxpayer joins the greater tax advantage over a period of time. Unlike a tax amnesty that rewards tax evasion such a policy would actually reward tax compliance.

The difficulty with such a policy, of course, would be how to balance the books in the short run. In the tax year 2014 about Rs884 billion were collected in direct taxes. If about Rs150bn less are collected progressively every year for four years during a structural adjustment process until a nominal lower tax rate is reached, Pakistan will need to tap alternative resources for the additional trillion rupees or so of revenue. A mixture of international structural adjustment support, quantitative easing, indirect taxes and additional non-tax revenues can address the cash flow difficulties in the first two years.

In the longer term the growth and investment such a policy is likely to generate will far outstrip the initial difficulty that the government would face. Given that this move would have poverty as the target a newer socialist thinking could well incorporate such a move. If China can do it why can’t other socialist parties do it? Low corporate and income taxes will not only spur growth but will, in the medium term, expand the tax base and create job opportunities enabling socialist governments to address social inequalities through jobs rather than dole. To accommodate the youth bulge hitting us over the next 10 years we need to generate growth and jobs to survive. A low-tax, high-growth policy is the alternative that the opposition parties must articulate and move towards since the government is too right-wing, blinkered and unimaginative to have this vision.

The writer has remained caretaker finance minister of Sindh and is a former chairman of the Sindh Revenue Board.

Published in Dawn, January 18th, 2016