Historically, taxation has been crucial for nation-building and welfare states. After the destruction wrought by the Second World War, European societies were rebuilt by progressive taxation to be spent on social welfare programmes and infrastructure.
A fair tax policy can play an essential role in achieving an inclusive society through two main channels. First, taxes provide the main revenue source for essential public programmes such as healthcare, education and social protection. Second, taxes can become a powerful policy tool for redistribution of income and wealth in a society. Progressive direct taxes such as the personal income tax, property tax and wealth taxes can play a substantial role in preventing inequalities of opportunities. Over the last seventy years we have been unable to recognise this fundamental role of taxation in national building.
There is a lack of political will to reform the fiscal system, which in its current form sucks resources upward to benefit a few at the top, rather than taking away from the rich for redistribution. Pakistan has reached a point where it would be hard to run crucial state functions let alone bridge the development deficit and invest in people necessary for long-term economic growth.
At the present, Pakistan is going through difficult circumstances. It has been in a physical war for a decade, but it now has to wage another war – against poverty, social and economic exclusion. This unprecedented security and human development challenge provides a tremendous opportunity for ambitious domestic resource mobilisation vision to meet the mounting future expenditure requirements.
The annual budget process provides an opportunity to reflect upon the fiscal policy. Rather than using this opportunity to create a progressive fiscal vision, successive governments have tried to manipulate figures for political consumption. Not being able to achieve projected revenue targets, successive governments have borrowed from internal and external sources to meet expenditure. Such borrowing has hardly been the subject of public scrutiny.
The causes of the low level of tax revenue mobilisation have been known from some time but no government has dared to fix it. The tax revenue mobilisation vision must be created on the principle of nation-building, which means serving the interests of the majority of citizens rather than the needs of global capital or national vested interests. What this means in practical terms is that the indispensable needs of basic healthcare, drinking water and sanitation, education, food and nutrition and social protection of all citizens should be met on a priority basis to create equal opportunities for all.
The current tax revenue mobilisation is insufficient, hovering around 10-11 percent of GDP, and the tax mix is biased towards indirect taxation; direct taxes hardly contribute to one-third of total tax revenue. In particular, personal income tax is very low. Similarly, revenue generated from property tax is very little and wealth tax is largely missing, when seen in contrast to the country’s wealth concentration.
The negligence in harnessing tax revenue potential is creating a vicious cycle of lower social spending where it is needed the most, and encouraging concentration of wealth by the rich through tax avoidance. As a result, increased wealth is being used to buy politics and further multiply fortunes.
There are five ways to strengthen a more progressive revenue mobilisation. First, the regressive impact of sales tax should be reduced through setting lower rates, exemptions on food and necessities and exemptions for small and medium enterprises (SMEs).
Second, Pakistan needs to bring about a revolution in personal income tax collection. Personal income tax remains small; only 1.8 million people out of 220 million file tax returns. This narrow income tax base is a major challenge and broadening the tax net is crucial. There are numbers of services which are either out of the tax net or not contributing their fair share. Similarly, agricultural income tax is an unsettled issue. The postponement of this essential revenue source on different excuses will not help. Hopefully, the measures announced to simplify personal income tax rates with lowering rates and reducing bands will help achieve this objective if matching institutional arrangements, building public trust in tax authorities, and transparency are practised.
Third, property and wealth taxes could be an additional source of revenue mobilisation which is less explored in Pakistan. Taxes on wealth and inter-generational transfer of wealth are highly progressive, targeting only the richest group in most cases. More importantly, they are essential to prevent excessive concentration of wealth and power in the hands of a few, and to ensure greater equality of opportunity across generations.
Fourth, strengthening the corporate income tax regime to ensure that large corporations, especially multinationals, pay their fair share of tax through enhanced international and regional cooperation would be very important. Efficient administrational and global cooperation is needed to address the challenge of corporate tax avoidance and evasion through tax havens or low tax rate jurisdiction. Also important is to chase local companies. Two years ago, a study by SDPI and Oxfam found that in 2014 only 24,186 out of 62,000 registered companies filed tax returns. Almost 62 percent of companies and 75 percent individuals do not file returns.
Fifth, fiscal policy measures must eliminate unproductive tax concessions and incentives either provided to national companies or multinational corporations on the pretext of attracting foreign direct investment. Research has shown that tax concession is not the top priority of foreign investors, but one factor among other prerequisites.
The current fiscal policy has two drastic consequences on the poor and middle classes; it is unable to mobilise sufficient resources to allocate for the provision of public services, which then have to be bought from private providers. That puts an extra burden in the shape of higher consumption taxes.
Successive governments have been unable to set a pro-poor fiscal policy direction; and we cannot expect miracles in an election year budget. That said, saner elements in government and other public institutions must introduce radical reforms and implement them for nation-building. People deserve better access to public health, food and nutrition, water and sanitation, quality universal education and social protection. More importantly, these are important factors for future economic growth as well.
The writer is an Islamabad-based environmental and human rights activist.