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Pakistani fiscal cliff

January 06, 2013

IN the US $600 billion fiscal cliff is viewed both by Republicans and Democrats with different perceptions while agreeing to resolve this issue to save their future.

Republicans look to limiting deductions benefiting mainly high-income group by slowly increasing the current 35 per cent top income tax rate to further up. It will raise an amount of $600 billion over a period of 10 years if the deduction cap is applied at the present income threshold level of $250,000 per annum.

On the contrary, Democrats believe to extend current tax rates to lower income group while not targeting only top two per cent income group. Just for a bit more information, the Washington Post has recently reported that their government is expected to reach the current debt ceiling of $16.395 trillion in February 2013 and the limit could increase from $730 billion to $1.25 trillion in 2013 and from $1.3 trillion to $2.2 trillion in 2014.

Although some of the internal reports claim that the actual debt is more than $100 trillion and the Obama administration is blamed for increasing $4 trillion in his last tenure.

We are also facing rather a worst situation reaching a total debt of more than Rs12 trillion, 61 per cent of the total GDP. We are a country where Rs600 billion goes to bribery each year (Transparency International claims Rs8.7 trillion corruption during four years of the present government), we have 91 per cent parallel hidden economy, we save less than 10 per cent of the GDP, we have Rs60 billion Benazir Income Support Programme, perhaps unlimited discretionary power of the prime minister (Yousuf Raza Gilani enjoyed Rs60 billion as discretionary amount), two-digit inflation, daily printing of Rs2 billion currency and growth rate close to three per cent.

Our highest prevailing income tax rate fixed by the Musharraf government is 20 per cent on the highest earning group and the registered taxpayers are only one million. Capital flight is yet another enigma.

Interestingly, none of the leading political parties has ever taken any trouble to tell the people how they will overcome this ‘fiscal cliff’ which involves not only exuberant debt but several other economic woes.