that mean higher growth and more employment for people? All over the world people associate a tax cut as a policy instrument for stimulating growth. Only in Pakistan will a tax increase stimulate growth. Do they really think that investors will invest more, workers will work harder, and savers will save more because taxes increase? This theory belies all received wisdom as well as empirical evidence: taxes take from production; they do not increase it.
There is also another belief that if we get more revenues the government will spend the money wisely and judiciously, giving us more public goods like education, health and infrastructure. Let us recall that in 2002 we got a rescheduling which did allow us to generate ample fiscal space to do all these good things. Where did we end up? With a humungous energy deficit, bankrupt PSEs, failing education systems, and a deteriorating law and order situation.
Did we make the societal investments for public goods? No. Why then do we hold on to the assumption that more revenues will automatically increase welfare through better public good generation?
Another theory that donors love to put forward is that when people pay taxes they have (or will have) more control over governance. The fee-paying theory of revenue is not cognizant of literature. The Sheriff of Nottingham, despite continuously increasing taxes, gave no representation to people.
This brings us to the heart of the problem. Taxes follow a social contract and a certain need for creating public goods. That is why through history, the sovereign’s power to tax has been severely curbed through parliaments and popular vote. Kings and governments had to prove a need to tax through identifying clear public welfare programmes that the tax was going to finance. This was at the heart of enlightenment thinking. Donors have forgotten history and now without regard to public welfare want the government to get 15 percent of GDP.
On the other hand, people in Pakistan are asking what their taxes are used for. ‘I get no public service, yet I pay high taxes. Why?’ This is a frequent lament. People are intuitively in line with enlightenment thinking. Surprisingly donor philosophy remains anti-enlightenment, forcing all Pakistanis to pay more regardless of the quality and quantity of public service. Remember there is no applause when the Sheriff of Nottingham raises his tax collection because everyone knows he is collecting for his own welfare.
Our poor governance and failed public service delivery mechanisms are well-known. Should we give such a system more revenues? Surprisingly that has become the mantra. What did the system do well when they had more money in their hands? They engaged in poor quality projects that did not deliver social returns. They also engaged in self-dealing – maximising their own perks, plots and welfare schemes. They created unnecessary and unprofitable public sector enterprises.
When I raise this argument with donors they point to the need to raise taxes to meet with the variety of donor initiatives that they want in the country, ranging from social protection to money-laundering to environment. So we should tax our people more to follow agendas determined in some dark corridor where we had no say.
Growth is about productivity, investment, jobs and opportunity. Educated children without jobs and opportunity remain unemployed and potentially a destabilising force in society. I do not understand why serious people think growth will happen with an increase in revenues. It is a spurious argument and we should not take it seriously.
Taxes and revenues should be increased in line with what enlightenment has taught us. Our governance system needs reform to make it responsive to people’s needs and to develop its capacity for public service delivery and for public policy. Reform will also remove the mechanisms of rent-seeking such as perks and plots and align public servants’ incentives with public service delivery. When people see a responsive and capable public sector, their willingness to pay will increase.
To me it seems that public service delivery reform must come before revenue collection. Donors have got it wrong.
The writer is former deputy chairman of the Planning Commission.
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