Our economy’s problem: The rich don’t pay their taxes

Govt officials, including PM Gilani, pay taxes on salaries but not their personal assets.

Any chance of progress in Pakistan is contingent on two critical issues: economic recovery and social reform.  Every person in Pakistan, be it a high ranking politician or bureaucrat or a person belonging to the middle or lower classes, agrees that the economy—and problems resulting from its degeneration—are a significant cause of the country’s woes.

The devastation caused by the recent floods has only added to the economic dilemma.  Following this disaster, numerous NGOs and countries around the world have promised aid to Pakistan, but the actual funds received don’t come close to the pledges.  It seems now that even Pakistan’s friends are fed up with the persistent neglect of its own citizens.

Tax evasion: a rich man's crime


People expect Pakistan—as they should—to find ways to help its own citizens.  During a recent visit to Pakistan, US Secretary of State Hillary Clinton said that the international community can only do so much and urged Pakistan to boost its tax base through meaningful reforms. According to MSNBC, “Clinton said Pakistanis have more resources but the country needs to reform its tax system to strengthen its government.”

In September, the Carnegie Endowment for International Peace reported that “Fewer than three million of Pakistan’s 175 million citizens pay any income taxes, and the country’s tax-to-GDP ratio is only 9 percent.”  This is one of the lowest tax-to-GDP ratios in the world.

Mohsin Hamid writes in his Dawn News Editorial that in comparison to Pakistan, “Sri Lankans pay 15 per cent of their GDP in taxes, Indians pay 17 per cent, Turks pay 24 per cent, Americans pay 28 per cent and Swedes pay a fat 50 per cent.”

The main reason behind Pakistan’s low tax-to-GDP ratio is tax evasion by the country’s elite. Federal officials, including ministers (even PM Gilani), only pay taxes on their government salaries and not on their personal assets.  Although the government promises to take steps toward tax reform, it continues to dodge the issue every chance it gets.

At the recently held US Global Leadership Coalition Conference, Clinton took a tougher stance on this subject: “Countries that will not tax their elites but expect us to come in and help them serve their people are just not going to get the kind of help from us that they have been getting.  Pakistan cannot have a tax rate of 9 percent of [gross domestic product] when landowners and all of the other elites do not pay anything, or pay so little it's laughable…”

The International Monetary Fund (IMF) has threatened to freeze the $11 billion loan that was approved for Pakistan in 2008 until some serious tax reforms are undertaken.

Taking from the poor, giving to the rich

What all of this boils down to is that serious reforms are in order.  It is an embarrassment that we continue to beg others to come to our help when the solution is available within our own borders.  As a solution to this economic crisis, President Zardari has proposed a one-time tax.  Naturally, his proposal sparked an outcry all over Pakistan as it was perceived to be another opportunity to rob the middle and lower classes, while handing the ruling elite a free pass.

Zardari chooses to ignore the fact that unless the entire tax structure is reformed, Pakistan will continue raking in debt and will be unable to meet the demands of its citizens.  While Zardari and the PPP are not finding any success, a more promising effort toward reform has been undertaken by another element of the Pakistani government.

MQM helps with land reforms

Recently, the Muttahida Quami Movement (MQM), a coalition partner of the PPP-led government, submitted the Redistributive Land Reforms Bill in the National Assembly.  Land reform is a major potential contributor to tax reform.  The bill proposed by MQM aims to “reduce the wide disparity of income and opportunity between the rich landlords and the poor tillers of the soils…”

According to the World Bank, “More than two-thirds of Pakistanis live in rural areas, of which about 68 percent are employed in agriculture (40 percent of the total labor force).”  Due to inequality in land distribution, there is a wide gap between landlords and peasants.  Approximately 2 percent of households control 45 percent of the land.  If implemented, the new bill will establish a limit on family holdings of irrigated land at 36 acres and 54 acres of arid land.  Furthermore, the bill calls for the resumption and redistribution of all excess land amongst its landless cultivators, landless tenants, and small land-owners by the government, while also compensating the previous land owners.

Although many years have passed since it has been on the parliament’s agenda, land reform is not a new issue.  Land reforms first emerged on the scene in 1959 during the military dictatorship of Ayub Khan, followed by a campaign led by Z A Bhutto in 1972 and 1977.  When General Ziaul Haq ended Bhutto’s regime, the Pakistani courts declared redistributive land reforms un-Islamic and therefore unconstitutional, leaving the legislation useless.  To cut a long story short, the attempts at land reform hitherto have been quite futile.

Expanding the tax base

The current tax structure in Pakistan has tremendous room for improvement.  While the new bill specifically addresses land redistribution and agricultural development, it will indirectly play a great role in the expansion of the Pakistani tax base.

In his article, “Doing Tax Reform Right: Think Big, Think Bold,” author Salahuddin Khan makes the case for “abolish[ing] all income tax and in its place introduce[ing] a gradually increasing property tax on real estate owned.”

He points out that while liquid personal assets such as cash are easy to hide, real property cannot be hidden, and is therefore easier to tax.  Khan also suggests incentivising the ownership of smaller portions of land by making it “disproportionally expensive to own over certain thresholds of land.”  The case Khan makes supports the undeniable link between tax and land reform.  But even though his suggestions may be great, they are useless without any kind of land reform first.

Whether other factions of the government will support the bill proposed by MQM remains to be seen.  If they do, Pakistan can establish a foundation which can be supplemented with various tax reforms.  Right now there is a critical need for discourse on this issue between all parties because Pakistan needs a strong combination of land and tax reform in order for any chance at economic recovery.