Taxing times

Published October 27, 2023
The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums.
The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums.

A FRIEND from the banking sector recently told me that he had resigned from his job. He was a pretty senior executive at a local bank.

I asked him why and what he had been up to since then. He said he felt that after the recent tax increases and with the inflationary hike we have been experiencing, and which is likely to continue for some time, he did not find his take-home salary enough to justify working full-time at the bank.

Since his resignation, he has been managing his family’s agricultural land and has also been investing in real estate. Income from these sectors is not really taxed. He said he was much happier now since he was working less and had more time (even to go to the gym everyday), and more income.

Not many people have inherited agricultural land and not many have enough savings to start investing or speculating in real estate. But the hike in inflation and taxation does tell us that there would be incentive effects on the margin for all people. And these will not be in the desirable direction.

Tax hikes lead to attempts to hide income or to find legal loopholes for reducing tax liability. A high enough marginal tax rate (ours is 35 per cent on high salary incomes) can reduce the incentive to work. For example, I know friends in academia who have refused consulting projects because the post-tax income is not enough to justify the effort.

Both are probably happening now. For a person with a monthly salary of Rs500,000 per month this year, the yearly income tax liability has gone up by Rs90,000, taking effective tax rates for them to about 18pc. For people with a salary of Rs1 million, the tax liability has gone up by Rs240,000 per year and their effective tax rate is 26.6pc.

What does the state want to do? Kill the salaried?

And it is clearly not just income tax that the salaried are paying in Pakistan. The sales tax is 16-18pc on most goods. Petrol has another 15pc tax, and there are taxes on mobile, gas and electricity usage as well. Road and vehicle usage are taxed separately. It is not surprising that many among the salaried feel that more than 50-odd per cent of their income goes to the government in various forms of taxation.

The hikes in taxation have come when inflation has been rampant. Some 35pc inflation means the salaried class has been under tremendous pressure to figure out how to keep budgets going and households afloat. Prices of electricity, gas, petrol, edibles — in fact, everything a household uses — have gone up significantly.

And then there is the additional taxation. This rankles badly. What does the state want? To kill the salaried? Even the Motorway toll is now a whopping Rs1,100 for a one-way journey from Lahore to Islamabad.

But there are three more aspects of the unfairness in our tax/expenditure system that should be kept in mind. One, there is no return that the taxpayers get from paying their taxes. Most salaried people send their children to private schools, do not go to public hospitals when health needs arise, and pay for their water, sewerage and other local services separately.

The kind of police protection and governance we get in Pakistan is there for all to see and need not be commented on. Taxpayers feel doubly cheated. In most other countries, if tax rates are high, returns in the form of decent education and health services, unemployment benefits, etc are also there. Here, we pay for a predatory state.

Two, many sectors where there are plenty of powerful and rich people are not in the tax net at all. Agriculture, trading, real estate are the bigger examples, but there are several others too, including professionals providing services (doctors, lawyers). The eye specialist I went to for an eye procedure wanted to be paid in cash and was not too keen on giving a receipt.

I am also reminded of the time when a neighbour of mine, a factory owner, asked me how much tax I had paid last year and then said he was paying a tenth of that. And he was the one who had a Mercedes car and a diesel-powered generator at his house. Many of these sectors and interest groups get massive subsidies from the government. Talk about adding insult to injury!

Three, we cannot even get the satisfaction that our tax money is being used well. UNDP Pakistan’s Human Development Report, of which Hafiz Pasha was the main author, said that something like Rs2,660 billion was being given in subsidies or transfers to the rich.

A lot of money is also wasted on non-productive expenditure by the government. Then there is the expenditure on defence that many see as excessive.

There are some 23m five- to 16-year-olds out-of-school children in Pakistan, and 40pc of our children are malnourished. Most Pakistanis do not even have access to safe drinking water. If the salaried are going to be taxed the way they are, at the very least the government owes it to its citizens to spend that money well. Or then, don’t tax families as much. This is the money many families could have used to improve their nutrition or education!

Given our current inflation hikes, the taxation rates for those in the net are just cruel. Especially when many others do not pay taxes and, in fact, enjoy subsidies and transfers at the cost of those who are in the tax net.

Sadly, the government has not been effective in either extending the tax net, reducing transfers to the rich or rationalising its expenditure. This will continue to corrode state legitimacy.

The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums.

Published in Dawn, October 27th, 2023

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