LAHORE: The foundation of any functional state rests on a strong fiscal contract between its government and its citizens.
In Pakistan, that foundation is weak, fractured and in urgent need of repair.
The country’s persistently narrow tax base reflects not merely an economic problem but a deeper societal flaw: a mutual pretence between state and citizen, in which both feign compliance to preserve a broken status quo.
The consequences of this fragile contract are far-reaching. A narrow tax base undermines state capacity, distorts public service delivery, and stifles economic progress. Without genuine accountability and institutional reform, the citizen-government relationship remains transactional and mistrustful. Instead of engaging in a virtuous cycle of revenue and public service, both parties operate within a system of evasive accommodation. The government, lacking either the will or the capacity to enforce equitable taxation, turns a blind eye to major tax evaders, while citizens — discouraged by elite privilege and wasteful spending — find little incentive to be fully compliant.
The result is a dysfunctional loop: the government pretends to tax its people, and the people pretend to pay. This culture of mutual convenience benefits only a select few, leaving behind a weak state apparatus unable to provide basic services or invest in meaningful development. Most Pakistani citizens do not object to paying taxes in principle — they resist a system that appears exploitative and unaccountable.
For meaningful change, the tax system must move towards fairness, transparency and reciprocity. Citizens are more willing to contribute when they see tangible benefits: reliable infrastructure, affordable healthcare, quality education, and a government that lives modestly and spends responsibly. When tax revenues are instead diverted to fund costly foreign trips, the extravagant lifestyles of politicians and bureaucrats, or perks for the powerful, public trust inevitably erodes.
One particularly glaring contradiction lies in the taxation of financial savings. Tax-compliant individuals earning profits on their savings face a 15 per cent withholding tax — effectively penalising those who already play by the rules. Is it justifiable that honest savers pay such a high rate on their declared earnings while vast sections of the economy — real estate speculators, traders and informal businesses — remain outside the tax net? Such imbalances foster resentment and further discourage participation in the formal economy.
The current tax regime is riddled with structural flaws: an over-reliance on indirect taxes that disproportionately harms the poor; under-taxation of the agriculture and retail sectors, which fuels perceptions of bias; inadequate use of technology and data integration to detect evasion; weak enforcement that allows non-compliance without consequence; and frequent amnesties that reward evaders while punishing the honest.
A fairer tax system — broadening the base through digital enforcement and ensuring strict oversight — could help restore the citizen-government contract. But reform must start at the top. When the ruling elite demonstrate financial discipline and the state spends transparently on citizen welfare, public willingness to contribute will rise.
Pakistan does not suffer from a lack of resources or patriotic spirit; it suffers from a lack of trust. Rebuilding that trust begins with acknowledging the flaws in the tax system, then replacing the politics of convenience with a vision of shared responsibility.