You know your state is failing if the poor pay taxes and the rich don’t

You should be thankful that there is no 5% carbon dioxide emission tax going by the name of a "Breathing Tax".

Skimming through the newspaper a few days ago, I read a front page news piece which shocked me. The piece stated that the elites are not paying taxes and that our tax system favours the rich. The shock was not at the findings of the Tax Reforms Commission (TRC) rather it was at the fact that it took the TRC a year and a half, and millions of rupees in research, to report something everyone knew from the beginning. When we already live in a system which promotes elitism and rewards it, why are we so surprised at the economic endorsements of this phenomenon. Let’s delve into this a bit.

Pakistan: A classic case of an elitist socio-economic state

Elitist politics is not a new phenomenon however few can boast its inescapable penetration like Pakistan can. If we trace our roots back to pre-partition, we still won’t be able to shake this off. Unbeknownst to most people the first meeting of the Muslim League was organised by the feudal and landowning class who were afraid of unsalvageable damage to their wealth due to the prevailing political uncertainty of that time. Therefore they formed a Muslim political organisation which would be loyal to the crown and safeguard their interests (we of course have a different view of the Muslim League as the saviour of the Muslims of India and so forth but it unfortunately started with elitist self-interest).

Our socio-political situation still gives us a great first-hand experience of an elitist system which perpetuates itself resembling a vicious circle. This is due to the poor majority living with the yoke of feudalism or tribalism around their necks. The feudal lords proceed to rule over their lands and then use their influence to advance their rule by winning pretentious elections. Their sons and daughters naturally follow them into their ‘inherited’ parliamentary seats and the vicious circle is perpetuated to another generation.

This ‘natural selection’ is only interrupted when military elites decide to overthrow the feudal aristocracy and rule for themselves. To some historical amazement these periods of military rule have coincided with imperial wars in the region such as General Ziaul Haq (1977 - 1988) and the first Afghan war, General Pervez Musharraf (1999 – 2008) and the War on Terror. (How the generals time their military coups to be politically ready just in time for a major international war is anyone’s guess).

Why people avoid taxes in Pakistan

Clauses 160 to 163 of the Constitution of Pakistan grants the Federal Government, the right to collect taxes in its name on income excluding agricultural income, on capital value, on sales (sales taxes) along with customs and excise duties. Pakistan has a relatively simple taxation system which has been inspired by other systems used around the world and thus levies two general types of taxes namely Direct Taxes (on salaries and business income) and Indirect Taxes (General Sales Tax and Value Added Tax).

Pakistan’s tax revenue has been growing steadily however it is nowhere near optimum levels. The perceived illegitimacy of the government, corruption within the bureaucracy and political administrations, misuse of government funds and tax exemptions for affluent military and dominant agricultural feudal landlords are some of the major reasons for tax evasion. Several studies have pointed to these issues but they have either not been taken seriously or the people who are in a position to address these issues, are themselves part of the problem.

Tax exemptions for the privileged

Since direct taxes affect the elitist rulers as much as salaried people, they find it best to avoid paying these taxes one way or the other. Cooking books, revaluation of payable tax and tax exemptions are some of the ways affluent people protect their affluence. It’s always amazing to see how the some of the upper most classes maintain middle class balance sheets to avoid taxation slabs.

Once this happens the government compensates by enforcing indirect taxation on items of daily use such as the sales tax and carbon tax (it’s the tax you pay on fossil fuels for the smoke or pollution your vehicle produces… wait what?). Whether you like it or not, you should be thankful that there is no five per cent carbon dioxide emission tax going by the name of a Breathing Tax.

For the benefit of the readers, let me list a few of the exemptions the TRC report must have mentioned.

-Military (All military pensions are tax exempt)

-Investors, brokers and shareholders (Income earned by mutual funds or investment companies are exempt along with income from federal securities)

-Ruling political elite (Rents or entertainment allowances paid for the president, governors and generals)

-Feudal Landlords (All agricultural income)

Ordinary people feel seriously burdened and cheated when they see the rich getting richer by hook or by crook, without any regard for paying their fair share to the society. It is very common in Pakistan for politicians to be tax evaders and that also of very large sums of money. They must be thanking their stars people are not demanding taxation on their Swiss bank accounts.

I sometimes wonder why the government spends unnecessary money on Tax reform reports when comprehensive reports on the same subject have been published over the years without any implementation. Perhaps the ‘perception’ of carrying out tax reform is more important to the general public than actual implementation of tax reform.

I would suggest the readers to go through the works of Jorge Martinez-Vasquez from the Andrew Young School of Public Policy (AYSPS), Georgia State University specially the 2008 report on Pakistan’s tax system reforms published in partnership with the Federal Board of Revenue (FBR), and World Bank. He also edited a book on the subject with Musharraf Rasool Cyan published by Oxford University Press, last year. With the ample availability of research and data on the subject, the only thing required is action.

No more. No action plans please!