Fear doesn’t fill coffers: global lessons for FBR

In Greece (2010-2015), austerity-driven tax hikes and aggressive audits -- implementedto satisfy IMF bailout conditions -- backfired. Public protests erupted, GDP contracted by 25 per cent, tax evasion surged to 30 per cent of GDP, and 250,000 small and medium enterprises (SMEs) shut down due to rising compliance costs.

In Kenya (2015-2017), the Kenya Revenue Authority launched aggressive audits and imposed heavy penalties on SMEs in a bid to boost revenue. The move backfired. Traders took to the streets in protest, SME compliance fell by 20 per cent due to fear of harassment, and annual tax revenue declined by 5.0 per cent.

In Italy (2011-2014), the ‘Redditometro’ system sought to detect tax evasion by auditing lifestyles -- such as car ownership -- and imposing heavy fines. The policy backfired. Compliance among high-net-worth individuals dropped by 15 per cent, and 10,000 wealthy Italians relocated to Switzerland, costing the state an estimated 2 billion euros. Mounting public backlash led to the suspension of the system in 2018.

In South Africa (2014-2018), the South African Revenue Service targeted high-income earners with aggressive audits and penalties to address fiscal deficits. The result: GDP growth slowed to just 0.8 per cent, and 30,000 high-net-worth individuals emigrated—costing the country R50 billion in lost tax revenue.

In France (2012-2014), the French Tax Authority introduced a 75 per cent supertax on annual incomes exceeding 1 million euros and intensified wealth tax audits. The policy backfired. Economic growth stagnated at 0.5 per cent, while 42,000 millionaires left France, resulting in a 60 billion euros loss in tax revenue.

In Nigeria (2017-2019), the Federal Inland Revenue Service began seizing bank accounts in an effort to improve compliance. The approach backfired. Public distrust increased, compliance improved by only 5.0 per cent, and 70 per cent of targeted businesses either shut down or relocated to Ghana -- causing a $500 million loss in revenue.

In Norway (2022-2023), the Norwegian Tax Administration raised wealth and dividend taxes by 20 per cent, targeting high-net-worth individuals. The move backfired. Business investment fell by 5.0 per cent, and 82 wealthy individuals -- collectively worth $4.3 billion -- relocated to Switzerland, reducing state revenue by $150 million.

Countries like Greece, Kenya, Italy, South Africa, France, Nigeria and Norway show that overly aggressive audits, account seizures, or lifestyle-based enforcement create fear and distrust. Yes, compliance falls, businesses shut down or go informal, and revenue declines, not rises. The three most important lessons for the Federal Board of Revenue are: Lesson 1: Enforcement should be firm but fair -- focused on facilitation, not intimidation. Lesson 2: Targeting wealth too aggressively can trigger capital flight, undermining revenue and investment. Lesson 3: Avoid overburdening businesses during tough economic times; doing so risks collapse and long-term revenue loss.

Here are three key non-coercive measures the FBR should consider: Measure 1: Simplify the tax system, following the UK’s Making Tax Digital initiative, which increased compliance by 25 per cent. Measure 2: Leverage technology, such as Estonia’s AI-driven, blockchain-based e-Tax system, which tracks transactions in real time -- raising 500 million euros annually and boosting compliance by 40 per cent. Measure 3: Expand tax incentives especially for SMEs and startups, modelled after Singapore’s Start-Up Tax Exemption, which formalised 70,000 businesses and generates 2 billion Singaporean dollar annually. To be sure, tax crackdowns backfire. Yes, from Greece to Nigeria there’s been a very high cost of heavy-handed taxation.

The writer is a columnist based in Islamabad.