Monday May 27, 2024

Myths about taxation

Let’s examine tax-to-GDP ratios in various western European countries during 2022

By Dr Murtaza Khuhro
April 07, 2024
A view of the Federal Board of Revenue headquarters in Islamabad. — FBR/File
A view of the Federal Board of Revenue headquarters in Islamabad. — FBR/File 

Do our esteemed finance minister, prime minister, policymakers at the Federal Board of Revenue (FBR), and economic managers know why the tax-to-GDP ratio is significantly higher in developed countries compared to developing ones? They seem not to. More concerning, however, is their apparent lack of interest in understanding these dynamics. They appear to be primarily focused on adhering to the directives provided by international financial institutions such as the International Monetary Fund (IMF), Asian Development Bank, and World Bank, often without critical analysis or adaptation to local contexts.

Let’s examine tax-to-GDP ratios in various western European countries during 2022: Sweden stood at 44.2 per cent, Austria at 41.9 per cent; Belgium led with 46.3 per cent; Denmark closely followed at 46.2 per cent; Finland was at 43.1 per cent, Iceland at 39.2 per cent, Ireland at a relatively lower 29.5 per cent, the Netherlands at 38.9 per cent, and Norway at 42.2 per cent. These figures raise an important question: Is the primary driver behind these high tax-to-GDP ratios an efficient and inclusive tax administration system? While tax administration efficiency and the policy of taxing every sector of the economy are undoubtedly important, they are not the only factors. A deeper understanding of the tax base itself is crucial.

What exactly determines the tax base? Without a clear comprehension and a strategic approach to expanding the tax base, our economic and finance managers may not be able to meaningfully increase the tax-to-GDP ratio. Instead, they might continue to reiterate the same outdated strategies month after month, year after year, as has been the case for the past four to five decades.

At the core of the issue is a lack of a proper philosophical approach to understanding the economy, its true drivers, the conditions of the working populace, and the concept of inclusiveness. This approach requires more than just technical know-how; it demands a holistic understanding of economic dynamics, societal needs, and the role of governance in fostering a fair and prosperous society. Only with this comprehensive perspective can policymakers truly address the challenges of enhancing the tax-to-GDP ratio in a way that supports sustainable development and equity.

It is crucial to avoid misunderstandings that fail to acknowledge the direct relationship between the tax base and the economic base. The tax base is intricately tied to the depth and breadth of the economic base. In other words, the size and strength of the economy have a direct impact on the tax revenue generated. However, it is essential to recognize that the economic base itself relies heavily on the inclusiveness and involvement of its most critical factor: the citizens of the country.

The active participation and engagement of the population in economic development and growth initiatives significantly contribute to the overall strength and sustainability of the economy, thus influencing the tax base. Therefore, understanding and appreciating the interdependency between the tax base and the economic base, as well as the crucial role of citizens in driving economic progress, is paramount.

Where does the true powerhouse of human capability lie? Not within our muscles, but within our brains. Societies that rely predominantly on the physical strength of their citizens are doomed to lag unless they embrace the transformative potential of science, technology, globalization, and the cultivation of brainpower.

Regrettably, many minds, especially those shaped by Western education, hold deeply flawed and distorted views on governance, GDP growth, and the tax-to-GDP ratio. The gravest misstep in their ideology is their adherence to the trickle-down theory, a concept both profoundly inhumane and dismissive of the citizenry.

If GDP growth does not translate to the economic empowerment and prosperity of the general population, the trickle-down effect merely ensures that wealth accumulates for the exploitative elite, who then dispense their scraps as charity to keep the working class subservient and productive. Such a system is the epitome of degradation. What, then, is the advisable path? It involves the comprehensive empowerment of all citizens through the enhancement of their brain power capacity via education and skill development, leveraging cutting-edge technologies like simulations. Education institutions must prioritize skill development from an early age.

Yet, it is evident that those who uphold the status quo, with their antipathetic views, lack the willingness to shed their colonialist perspectives and embrace the rapid changes transforming our world.

Celebrating economic growth during Pakistan’s dictatorships, notably Ayub Khan’s era, while ignoring their harmful impacts reflects a deeply inhumane perspective. Such regimes distorted societal norms, encouraged extremism, and allowed corrupt individuals to exploit the system for personal gain.

This selective admiration overlooks the significant social, political, and moral costs, including the undermining of democracy, erosion of civil liberties, and suppression of dissent. Romanticizing GDP growth from these times without considering the human rights abuses and the stifling of democracy highlights a flawed concept of progress. True development should be holistic and inclusive and foster a governance structure that promotes equitable prosperity for all.

We stand at the dawn of an era defined by generative artificial intelligence, home to innovations like Devin, Devika, OpenAI, and advanced AI software engineering tools like Grok. Within a few years, we may enter the age of artificial general intelligence (AGI), with millions of robots possessing intelligence surpassing that of humans, operating across various sectors, including the primary sector: extraction of natural resources; the secondary sector: processing and manufacturing; the tertiary sector: the service industry; the quaternary sector: knowledge-based activities; and the quinary sector: high-level services activities. This shift demands a re-evaluation of our values and strategies to ensure that technological progress equates to broad-based human prosperity.

Article 7 of Pakistan’s constitution defines the state as encompassing federal, provincial, and local governments, parliament, and provincial assemblies. These entities must urgently recognize the realities of rapidly evolving generative artificial intelligence (AI) and the impending developments in artificial general intelligence (AGI). Traditional approaches are becoming increasingly obsolete in the face of these advancements. All legislators and executives must acknowledge these new realities and immediately abandon outdated, ineffective methods and policies. We must embrace the era of generative AI, preparing with foresight for the future to be shaped by artificial general intelligence.

The writer is an advocate of the high court and a former civil servant.