Why don’t we pay taxes?

September 18, 2017

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WHAT’S the most depressing economic statistic that is churned out repetitively in Pakistan? It’s the number of taxpayers. Time and again, the government and donors embarrass us for doing our nation a huge disfavour. In his first address, Prime Minister Shahid Khaqan Abbasi lambasted Pakistanis for not paying taxes.

Yet these are just myths. The fact is, we are one of the most overtaxed nations in the world. Simple arithmetic will do. Let’s start with disproving the most widely quoted number: only 1.21 million citizens pay income tax, ie less than one per cent of the population. But statistics (like the State Bank of Pakistan annual report) suggest that there are more than 57.5m employed people in the country. Since they are employed, they must be earning something and incurring expenditures on goods and services.

There is no good or service in Pakistan that is tax-free. Therefore, around 58m people are paying income tax one way or the other since their expenditures obviously come from their income.

It is crass anti-intellectualism to repeat this old, tired mantra.

The same number can dispel another myth, that less than 1pc of Pakistan’s population pays taxes. Since Pakistan’s population is about 200m, the implication is that at least 29pc of the population is paying taxes. This number goes up when one considers the working-age population (15-59 years of age). As per the Economic Survey 2016-17, 61.4pc of the population is of working age, meaning around 122m people. The 58m people constitute approximately 48pc of this number.

Around 140m mobile-phone users pay more than 20pc tax on the total amount of load. By end 2015, the number of registered vehicles in Pakistan had surpassed 17m (and was growing). They run on fossil fuels, which are subjected to multiple taxes. The rate of sales tax on different goods and services is one of the highest in the world. Add to these the plethora of surcharges and duties, and what we have is a mind-boggling list of extractive and regressive methods of cheating people out of their earnings.

All these taxes are obviously extracted out of the income of those who earn. It is crass anti-intellectualism, then, to repeat the same old, tired mantra of ‘Pakistanis don’t pay taxes’. From birth (all the expenses that parents bear before birth and at the time of birth) to death (burial places, in cities at least, are sold for a price), we are being excessively taxed. If the intangible taxes (negative spillover of poor governance like choked roads, polluted air and water, the absence of waste disposal, poor law and order, etc), are also brought into consideration, then the taxation burden quadruples.

Now that some mistaken taxation myths can safely be buried, we need to probe this issue further. Begin by asking two all-important questions: What exactly is our tax ‘problem’? And what kinds/forms of taxation policies do we need to implement? (Your answers need not be the same as mine.)

For policymakers, our ‘tax problem’ is that our revenues (around Rs3.8 trillion) are not enough to meet our expenditures (around Rs5tr). Wrong! Pakistan is not the only country where expenditures are more than revenues. Our issue stems from unproductive use of what’s at hand. If the expenditure is productive, then revenue shortages are not so debilitating since the expenditures generate increased revenue possibilities for the future.

Our ‘tax problem’, in short, is that we are poor at managing and judiciously using revenues. If we could productively use revenues half our revenues would not have been spent on paying interest on debt.

On to the second question, the answer to which would seem to be a rather settled issue in Pakistan. Everybody agrees that we need ‘progressive’ taxation, which in simple English implies taxing the rich more to redistribute. If that were to happen, would Pakistan be transformed? A probable answer comes from South Africa, which has the most progressive tax system in the world.

Yet the South African economy suffers from high income inequality. The reason is the absence of growth and quality-enhancing inclusive institutions. For example, like Pakistan, South Africa has a poor public education system, an institution that is critically important in stimulating economic growth and improving life quality in the long run. Other such institutions (such as research and development culture) are almost nonexistent in Pakistan.

So, no, progressive taxation is not going to automatically transform Pakistan into Disneyland. We need to have inclusive institutions and avenues through which tax expenditures can generate growth and an enhanced quality of life. In Pakistan’s case, these institutions are either missing or non-functional or in a sorry state. Thus, the mechanism for transforming tax expenditures into something meaningful is absent.

Not surprisingly, the growth of tax revenue from a mere Rs7.5 billion in 1972 to a colossal Rs3.8tr in 2017 has never proved enough for the ever-growing leviathan, which seeks even more without any clear plan for its productive use. What’s the guarantee that if tax revenues touch the required Rs5tr mark, unproductive expenditures would not gallop to Rs7tr?

Does all this imply that Pakistanis don’t indulge in evading taxes? No. A certain percentage of Pakistanis, just like any other country in the world, do evade taxes. But that’s not the issue, which is about why people do so. After all, the same people give out more than Rs400bn in charity every year. What gives? Obviously, those who contribute profusely towards charity believe that it will earn rewards (in the afterlife). The same expectation of reciprocity is absent in the case of paying taxes.

I will bring this article to a close by addressing the respected prime minister. Dear sir, instead of calling us tax thieves, you should have thanked the Pakistani nation for not having risen up and burned down the rent-seeking edifice that goes by the name of government. Please understand that to realise more taxes, you need to build trust with the people. Once you earn their trust, the apple (taxes) will automatically fall into your lap.

The writer is an economist.

shahid.mohmand@gmail.com

Twitter: @ShahidMohmand79

Published in Dawn, September 18th, 2017