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June 9, 2019

Dear prime minister


June 9, 2019

Sir, you are the first prime minister after decades whose personal agenda – anti-corruption and anti-poverty – is perfectly aligned with our national agenda. The fact is that the PTI, having won in all four provinces, is now the only national party left. Sir, ‘truth does not speak to power’.

Wisdom has it that as “people become more and more powerful those around them are less likely to divulge hard-hitting truths to them. Instead people around them become more concerned with flattering them. Wise men say that “if you want the truth try hanging around the periphery of power rather than at its center.”

Sir, every man, woman and child in this country on average pays Rs13,000 worth of sales tax, petroleum levy and customs duty a year. Sir, the additional burden in the upcoming budget is estimated to be around Rs1.4 trillion or Rs47,000 for each and every Pakistani family. Sir, the truth is that for every “one percent increase in indirect taxes, economic growth would decrease by 1.68 percent.” This is the conclusion of a paper tilted ‘Indirect taxes and economic growth – An empirical analysis of Pakistan’ written by Shahzad Ahmad, Maqbool Sial and Nisar Ahmad in Pakistan Journal of Applied Economics (Vol 28 No.1, Summer 2018).

Sir, an increase in the tax rate will permanently reduce the level of output per capita. This is the conclusion of authors Ihtsham ul Haq and Naeem Akram in ‘The impact of tax policies on economic growth: Evidence from Asian Economies’.

Sir, empirical results “confirm that there is a negative relationship between taxes and economic growth in South Africa.”

Sir, the hard-hitting truth is that a “majority of the developed countries focus on the progressive tax ie tax increase with the increase in income level. The situation is worse in Pakistan and focus is on indirect tax.” This is the conclusion of a research paper by Najid Ahmad of Bahauddin Zakariya University.

Sir, the truth is that there’s solid evidence that high taxes on labor result in “low labour force participation, high unemployment and substantial informal employment. These taxes discourage both labor demand (by raising labor costs to employers) and labour supply (by lowering the real consumption wage of workers).”

Sir, the other truth is that the corporate tax rate in Pakistan is one of the highest in the world (reportedly the third highest). According to The Tax Foundation Taxes and Growth model, “corporate income taxes are the most harmful type of tax…..Reducing the corporate income tax will benefit workers as new investments boost productivity and lead to wage growth.”

Sir, the truth hardly ever speaks to power. Sir, the truth is that Pakistani leaders are the only ones on the face of the planet who go around the world screaming out loud that their fellow countrymen are ‘tax thieves’. The truth is that raising taxes is a donor-driven agenda – it has backfired wherever it has been implemented and it is bound to backfire in Pakistan.

Sir, our fiscal crisis is serious but raising taxes to close the budgetary gap is not the solution. There are two ways to bridge our budgetary deficit: raise taxes or cut spending. Sir, a research 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.”

Sir, 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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