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May 26, 2019

No more taxes


May 26, 2019

Our government currently spends around Rs8 billion more per day than it takes in – that’s a loss of Rs2.9 trillion every year. There are two ways to fill this whopping budget deficit: raise taxes or cut spending. A study spread over 37 years and 21 countries stands witness that “countries with successful fiscal reforms, on average, closed 85 percent of their budget gaps with spending cuts.”

We joined the IMF on July 11, 1950 – and have since signed 21 ‘arrangements’ with the Fund. Our government, for the past 50 years, has been experimenting with raising taxes to solve its fiscal problems. We will – most probably – be entering our 22nd ‘arrangement’ with the IMF and will once again be experimenting with the raising of taxes to solve the government’s problems. For the record, our government, for the past 50 years, has failed to solve its fiscal problems by raising taxes. Albert Einstein said, a good 80 years ago, that ‘insanity is doing the same thing over and over again and expecting different results’.

To be certain, there isn’t a country on the face of the planet that has managed to solve its fiscal problems by raising taxes. On the contrary, “years of data from around the world show that when nations try to solve a fiscal crisis primarily by raising tax revenues, they tend to fail.”

Corporate tax in Pakistan is already the highest in the world. The raising of taxes lowers corporate profitability-and increases unemployment. The raising of taxes decreases disposable income-and slows down the economy. The general slowdown of the economy decreases tax collection.

We need to do two things: cut taxes and broaden the tax base. A tax cut will encourage Pakistanis to ‘work, save and invest’. We must, at the same time, finance the tax cut by spending cuts. The only way to come out of our fiscal problems is to grow out of them-not raise taxes.

Of the 193 member states of the United Nations, Pakistani leaders are the only ones who call their fellow countrymen “tax thieves”. Which country has ever come out of its fiscal crisis by raising taxes alone? Yes, raising taxes is a donor-driven agenda (the top priority with the donors is the payback of their loans). Yes, for the past five decades we have been following a donor-driven agenda. The top priority within Pakistan ought to be growth. For the past five decades, we have been going nowhere – and if you are going nowhere any road will take you there.

Increasing taxes “cannot and will not solve” our fiscal problems. Our singular focus on ‘raising taxes’ is wrong. Our singular focus ought to be ‘economic growth’ (tax revenue will go up as an automatic consequence of economic growth). We need to encourage four things: ‘work, savings, investment and innovation’ – and the government’s tax revenue will go up as an automatic consequence.

Pakistanis are over-taxed. Yes, most of that taxation is regressive whereby the heaviest burden of taxation falls on low-income earners. A reduction in corporate tax is bound to stimulate economic growth by enhancing both investment and productivity. The secret to success lies in economic growth – not growth in taxation.

Conclusion: Our government’s problem is ‘excessive spending, not inadequate taxing’.

The writer is a columnist based in Islamabad.

Email: [email protected] 

Twitter: @saleemfarrukh

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