No taxation with representation

By Saad Hafiz:

One is probably familiar with a inspirational slogan of The American Revolution: ‘No taxation without representation’, originating in the 1750s and 1760s, which meant that the British imposition of taxes on its American colonies was unacceptable without the expressed will of the people.

In Pakistan an arguably perverse view of this American proclamation has been historically in the vogue; ‘No taxation with representation’ which means that rich Pakistanis including a significant percentage of national and provincial legislators, among others, do not pay taxes, forcing the government to rely primarily on foreign assistance to prop up finances.

US Secretary of State Hillary Clinton has said that Pakistan must tax its elite if it wants to continue receiving financial assistance: “This is one of my pet peeves; Countries that will not tax their elite who expect us to come in and help them serve their people are just not going to get the kind of help from us that historically they may have; “Pakistan cannot have a tax rate of nine per cent of the GDP when land owners and all the other elites do not pay anything or pay so little it’s laughable. And then when there’s a problem everybody expects the US and others to come in and help,” Clinton said to a local audience.  British Prime Minister David Cameron pressed the point home, saying aid increases were a hard sell when: “Too many of your richest people are getting away without paying much tax at all and that’s not fair”. Clinton and Cameron live in societies where to quote Benjamin Franklin “The only things certain in life are death and taxes.”

Hopefully, it will not take an economic meltdown for policymakers to realize that Pakistan is committing economic hara-kiri through its heavy reliance on external assistance while leaving potential tax revenues untapped.  The country’s tax-to-GDP ratio of nine percent is one of the lowest in the world. Normally, low-income countries have tax-to-GDP ratios of fifteen percent to eighteen percent. Middle-income countries have tax-to-GDP ratio ranging between twenty-two percent to twenty-five percent, and tax-to-GDP ratio in high income countries is around forty percent.  Clearly, the Pakistan tax-to-GDP ratio needs to increase to augment revenues that are required to finance the country’s chronic budgetary imbalances.  This does not necessarily mean levying higher or punitive taxes, which can stifle growth but through fighting tax evasion and making tax collection more efficient.

Pakistan’s rich have historically paid little of their share in taxes.  It has been estimated that the landowning classes in Pakistan have been evading taxes to the tune of over $1.2 billion a year.  While the number of national lawmakers from feudal families represented in the country’s feudal democracy appears to be shrinking primarily due to increased urbanization, their financial clout seems undiminished.  The average worth of Pakistani members of Parliament is $900,000, with its richest member topping $37 million, according to a recent study by the Pakistan Institute of Legislative Development and Transparency in Islamabad.

There are periodic reports in the media, which give an impression that certain politicians, their wives and dependent children have amassed huge assets which require due scrutiny by tax authorities, who alone have the expertise to clarify the impression in the public interest.  These reports suggest that the assets amassed by politicians, their wives and dependent children were either not subjected to scrutiny by various tax jurisdictions or are highly understated.  There is a need for a correct valuation of the amassed assets of the politicians, their wives and dependent children, as in its absence, the tax burden on existing tax payers is unfairly increased. Since the politicians are rich themselves, and happily evading taxes, there is little will to change the system.  The Pakistani taxation system has been described; “As a system of the elite, by the elite and for the elite. It is a skewed system in which the poor man subsidizes the rich man.”

Clearly, exempting agriculture from taxation imposes a heavy burden on the rest of the economy as well as a significant loss of revenue for the budget.  As the tax exemptions given on agriculture income, agriculture sector has become a legal, and sometimes illegal, tax shelter for other forms of income. To avoid income taxes, transfers from the other sectors of the economy to agriculture are commonplace.  It would certainly be helpful, if external aid providers use their leverage with the Pakistani government, to insist that hitherto untaxed or under-taxed sectors be brought under the tax net.

Equitable taxation is particularly important in a country where the rich-poor disconnect has been increasing overall.  A 2010 study estimated that 32% of Pakistan’s population of 180 million subsists below the poverty line. According to the Human Development Index, 60.3% live on under $2 a day.  The low per capita income in Pakistan reflects unequal distribution of income and high unemployment  One consequence of the yawning rich-poor gap is that it is filled and exploited by extremists.

An equitable national tax policy requires that everyone and every sector with a potential tax liability should be taxed. A tax must be perceived as fair and universal. Those have little should pay little, but they should pay something, anything that displays a commitment to the nation and its goals.  The politically and economically powerful elite must demonstrate its stake in society by carrying its share of the tax burden.

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