Monday July 22, 2024

Let’s not ‘do more’

By Abid Hasan
June 02, 2024
A labourer bends over as he carries packs of textile fabric on his back to deliver to a nearby shop in a market in Karachi on June 24, 2022. — Reuters
A labourer bends over as he carries packs of textile fabric on his back to deliver to a nearby shop in a market in Karachi on June 24, 2022. — Reuters 

In many countries, government departments are big black holes consuming enormous resources with very little to show how spending has benefitted the non-elites – the bottom 90 per cent of the people.

The situation becomes worse when government functionaries engage in extortion and create hassles for citizens and businesses. In Pakistan, unfortunately, over time the majority organs and departments of the state have become voracious black holes, and citizens are being asked to continue forking out more and more taxes to finance these black holes.

Pakistan is not unique in this respect – but now an outlier. With the next year’s budget around the corner, and the government intending to raise more taxes, the time has come for responsible legislators, media and citizens to question and oppose the continuation of misplaced and unjustified tax increases.

After the 7th NFC Award, budgets of every provincial department have increased hugely. Over the last decade, the budgets of provincial black holes have increased from Rs1 trillion annually to Rs5 trillion annually. In the last 10 years, we have spent almost Rs9 trillion on education, while education indicators have remained mostly stagnant or even gone down.

Over Rs5 trillion have been spent on health, with no impact on public health. Police departments have consumed Rs4.5 trillion, while law and order has deteriorated. Agriculture departments have consumed Rs3 trillion, while agriculture productivity has declined, and Pakistan has become a huge importer of food. Close to Rs4 trillion have been spent on roads and highways, not because Pakistan needs more roads, but because – as in most countries – these expenditures are the largest slush funds for contractors, bureaucrats, and politicians. And another Rs4 trillion spent on unjustified energy and agriculture subsidies and to finance losses of overstaffed and dysfunctional SOEs.

And the government wants to raise more taxes to increase the budgets of these departments and continue subsidies to the non-poor or subsidies which have not had any meaningful impact on growth?

Pakistan needs to take a deep breath on the ‘Do More’ tax mantra – even if it means a delay in the next IMF programme. Responsible legislators should insist that following strategic issues should be debated during the budget sessions of the national and provincial assemblies, before the government blindly pursues the ‘Do More’ agenda.

First, unless ruthless and across-the- board expenditure cuts are made and reforms are in place to fix black holes, the national and provincial assemblies must reject even a rupee’s increase in taxes. Tax morale in Pakistan is very low because citizens feel that corruption in government is rampant, quality of public services atrociously poor and we are spending on the wrong things.

From the lens of taxpayers and citizens, the ‘Do More’ tax mantra is neither compelling nor justifiable. To engender voluntary compliance and public support for increasing taxes, deep reforms of the federal and provincial expenditures – feeding voracious black holes – should be pursued more vigorously than actions to increase taxes. Excessive taxation, in situations where the government is corrupt and dysfunctional, is harmful to the economy.

Second, how much tax should Pakistan be collecting? There is no doubt that Pakistan needs to raise more taxes. However while deciding on the ‘right’ tax/GDP target to aim for, we also need to examine how countries like Bangladesh – with similar tax-to-GDP ratio as ours – have better human development indicators and much higher growth rates. Bangladesh has spent wisely, while we have spent foolishly and lavishly.

Third, who should be collecting the additional taxes? It is abundantly clear that the majority of future tax increases, especially to increase budgets of provincial departments, should be raised by the provinces (as in India, where tax collection by states is close to 7-8 per cent of GDP). If FBR taxes continue to generously finance more than 95 per cent of provincial expenditures, the provinces will continue to be more and more wasteful.

Fourth, who should be targeted for increasing tax revenues? There are no two opinions that the full force of law should be applied to bring everyone in the tax net, irrespective of source of income and all income must be taxed equally.

In this context, the proposed withdrawal of tax exemptions is long overdue. However, profitability of many segments of major industries depends on these giveaways. By withdrawing tax exemptions, we may kill/squeeze inefficient private businesses (and increase private unemployment) to sustain an even more inefficient, value-subtracting and overstaffed public sector. In such a situation taking money away from the private sector could be harmful to the economy.

Since additional tax will raise prices for the common citizens, consideration should be given to some form of special one-time tax on the rich. Under the present circumstance –where inequality has increased tremendously and inflation is driving people into poverty– it is necessary to send a message that the rich are sharing a greater burden of pain.

Another historic wrong that needs to be corrected is the trillions of rupees of tax evaded income parked in real estate. Pakistanis’ obsession with plots over the last several decades, largely driven by a tax exemption policy, has cost this country hugely. Instead of private savings being used to start businesses and build factories, people have parked their savings in unproductive real estate. The tax policy must now not only aggressively capture the capital gains in real estate, but also discourage investment in speculative real estate.

Fifth, the FBR’s tax mix needs to be changed fundamentally. FBR taxes are heavily skewed towards indirect taxes. This is a deeply flawed policy which has hurt the poor and stymied growth.

Sixth, where should the additional federal taxes be spent? Given our excessive debt levels, perhaps most of the additional revenues should be largely used for paying off federal domestic debt and sparingly used for increasing budgets of an inefficient and dysfunctional federal government. In fact, the federal government should stop collecting taxes for subsidies, and shift this expenditure to the provinces.

Seventh, fundamental (not cosmetic) reforms of the FBR are necessary to have an efficient and taxpayer friendly tax system. The FBR’s digitization programme is the right initiative, but global and domestic experience of government agency reforms is full of failures- - money and consultants cannot fix core public institutions.

Besides political will, the FBR will need to: (i) have the right leaders to manage change; (ii) reform the business process to eliminate the very personalized (and often extortionary) form of relationship between tax officials and taxpayers; (iii) centralize tax processing to make it impersonal; and (iv) eliminate tax targets which are arbitrary and have created a legal window for corruption.

In conclusion, Pakistan needs a clear and credible programme to fix black holes across all executive, legislative and judicial branches of the state; improve service delivery; and put in place a fair and progressive tax system. Unless the government takes concrete and credible initiatives on the above, responsible legislators, media and citizens should say now to more taxes.

The writer is a former adviser to the World Bank.