Taxes for welfare

Fiscal decentralisation and grass root taxation at local government level can make Pakistan a self-reliant and prosperous country

Taxes for welfare

As two-thirds of the tax collected is in the form of indirect taxes and one-fourth of the entire amount comes from petroleum and petroleum products at various stages (which is passed on to consumers), the overall incidence is regressive


-- Ishrat Husain, Governing the Ungovernable: Institutional Reforms for Democratic Governance


In his latest book, Dr Ishrat Husain has proved with facts and figures that the existing tax system favours the rich and imposes great burden on the less-privileged segments of society. Subjected to oppressive taxation, the middle class and people with fixed incomes are facing a hard time and the poorest of the poor (earning less than Rs250 a day) are forced to live in subhuman conditions.

What makes the situation more agonising is the fact that the major chunk of tax collection finances the unprecedented perks, perquisites and benefits of elites -- militro-judicial-civil complex, businessmen-turned-politicians and absentee landowners in power. They enjoy outlandish luxuries at taxpayers’ expense.

Non-taxation of luxury and commercial properties e.g. clubs and golf courses, unprecedented exemptions given to generals, judges and high-ranking civil officials causes huge losses to the national kitty. The government at its fag end, even before the budget that is yet to be announced on April 27, 2018, has given the ultra-rich reduction in tax rate from 35 per cent to 15 per cent through a Presidential Ordinance promulgated on April 8, 2018. However, the burden of sales tax ranging from 17 per cent to 35 per cent on the general masses is not reduced. In the coming budget, there is little hope that industrial units will get any meaningful relief from taxes. The narrative that Pakistanis do not pay taxes, popular with analysts, TV anchors, academicians, policymakers and foreign donors, is a hoax. The reality is that the poor are the victims of oppressive taxes, whereas the ruling elites are thriving on taxpayers’ money.

While budget allocations are inadequate for health, education and other services, elites in addition to hefty amounts as salary, perks etc, get expensive plots at prime locations. The annual budgets by the federal and provincial governments hardly focus on the welfare of public at large. The way our governments -- military and civilian alike -- have been wasting and plundering the taxpayers’ money is not a secret. Till today no serious effort has been made to undertake institutional reforms to right-size the gigantic militro-civil apparatus that even after taking major chunk of budget has miserably failed to deliver.

Empowerment of people through local governments should be our top priority as envisaged under Article 140A of the Constitution.

Pakistan has failed to achieve durable political stabilisation and sustainable higher economic growth due to perpetual failure of the ruling elites. The twin menace of burgeoning debt and monstrous fiscal deficit testifies to continuous fiscal mismanagement. The government has to borrow more and more money -- externally and internally -- just to meet day-to-day expenses.

The current fiscal year with impressive growth rate of about 5.8 per cent will entail the record fiscal deficit of our history -- over Rs2.2 trillion. Our total debt and liabilities, according to the latest figures released by the State Bank of Pakistan, have reached 74.7 per cent of GDP (Rs26,814.7 billion with total external debt of Rs9,413.2 billion) in the second quarter of the current fiscal year and in coming years these will rise with annual pace of not less that 15 per cent. There will be nothing in the forthcoming budget to overcome fiscal deficit and reduce debt burden, rather tax amnesties are being given to waive the money stolen/tax evaded, allowing to even white cash (yet not earned) for future -- this will cause huge tax losses in years to come.

There is no plan with any political party ruling in the centre or a province for uplifting the rural areas to a respectable status to check rising migration to urban areas, which is fast becoming a nightmare with every passing day. Budget making is a routine bureaucratic exercise for all the governments. They have no vision to make the country a self-reliant economy. They are not ready to cut wasteful, unproductive expenses, reduce the size of cabinets and government machinery, make government-owned corporations profitable, accelerate industrialisation and increase productivity and improve agricultural sector.

Reducing economic inequalities through a policy of redistribution of income/wealth is not the agenda of any political party -- their manifestos are based on rhetoric rather than any concrete plans to achieve this goal. Every night anchors on popular talk shows debate frivolous issues but never raise their voices against oppressive and anti-people tax policies. They never pose questions to leaders seeking their vision and strategy to make Pakistan an egalitarian state.

There is nothing to be pessimistic. We can make Pakistan a self-reliant and prosperous country through fiscal decentralisation and grass root taxation at local government level. Solutions are available. The only thing we require is to present the same, debate these publically and convince our political parties to make them part of their manifestos for elections 2018. Elections should be fought on these issues and with the pledge that on winning, they would be solved.

Empowerment of people through local governments should be our top priority as envisaged under Article 140A of the Constitution. Political, administrative and fiscal decentralisation is the key to democratisation of institutions. This is the most neglected area in Pakistan. Article 140A requires that decision-making power should be with the elected local governments. A council, elected by the residents, must enjoy the right to levy municipal taxes. Municipalities should be given wide-ranging powers. Extensive functions that fall within the specific sphere of authority must include education, healthcare and social welfare services. The municipalities should also be responsible for matters related to the residents’ free-time, recreation, housing, and the management and maintenance of their living environment (i.e. roads, streets, water supply and sewerage), as well as land-use planning and functional municipal structures.

In all successful democratic models, taxes at grass root level play a critical role in municipal self-governance. The power to levy and collect taxes is one of the cornerstones of municipal self-governance as it ensures that the municipalities can manage the functions that they have undertaken to execute or those for which they are responsible under the law. In social democratic countries e.g. Sweden, Norway, Denmark and Finland, the most important feature of fiscal management and delivery of social services is municipal tax. In 2017, Finland collected US$ 45 billion as municipal tax -- total tax collection of US$ 182 billion was 44.1 per cent of GDP. In Pakistan, total tax collection--both at federal and provincial level--in fiscal year 2016-17 was US$ 32.66 billion (just 11.5 per cent of GDP)!

If a country of 5.495 million people (Finland) can achieve 44 per cent tax-to-GDP level and through municipal taxation can provide free services of health and education, we a nation of 207.775 million can definitely do much more, provided there is a political will. One of the central constitutional principles regarding municipal self-governance in Finland is that when allocating new functions to municipalities, the State has also to ensure that they have the necessary resources to carry them out. Finland has a well-functioning relationship between the State and the local authorities, as well as a state-subsidy system which ensures municipal resources and residents’ equal access to services. We can learn from this great innovation of Finland. It can change the fate of our nation in a short span of time.

We have the resources but the system for self-governance as in vogue in Finland and elsewhere in the world is non-existent despite the clear command contained in Article 140A of the Constitution. Resultantly, power is not with the people but in the hands of the privileged few. We need to implement Article 140A in letter and spirit. Mere existence of local governments without political, administrative and financial power is not the fulfilment of constitutional command.

Decentralisation of financial powers requires levy and collection of taxes by local governments for meeting the needs of local residents in the form of education, healthcare and social welfare services. Municipalities working on the principle of self-governance alone can ensure that revenues are spent exclusively for the benefit of public and not the powerful segments of society alone.

Taxes for welfare