Time for a reality check
In Pakistan, given the current legal system, forcing people to pay broad-based tax on wealth is simply not possible.
There is an old joke about there being only two things wrong with most legal writing: The first is style; the second is content. In much the same way, there are only two things wrong with the wealth tax being proposed as the cure for Pakistan’s economic woes: The first is theory; the second is practice.
Let us start with theory first. Wealth is not just an accumulation of money; it represents accumulated savings. Savings are good because when those funds are made available to banks, they get redistributed into loans and credit for entrepreneurs which, in turn, is good for the economy. In other words, there is a direct link between public savings and the amount of liquidity in the economy.
The chain of events I posit above is actually easier to understand in reverse. Nobody disputes the fact that easy credit is good for business. Self-evidently, if people don’t put their money into banks, banks will have less money to dish out. And if people are going to get taxed for keeping their money in banks, then they will indeed be less likely to keep their money in banks. To put it another way, why would you keep your money in a bank (rather than under your mattress) if you knew the government would take some of the money you keep in the bank?
The short answer is that Pakistan is not the same as many other countries. Our legal and regulatory framework is a particularly toxic mess and, unlike India, our deep history of mistrust between the business community and the state has only been reinforced since independence, not mitigated. Finally, the mobility of capital in today’s world means that a wealth tax is not just useless but actively harmful.
Edward Terry, an English clergyman at the court of Emperor Jahangir, remarked acidly some 400 years ago that while there were many rich businessmen in the lands of the Great Mughal, “it is not safe for them... so to appear, lest that they should be used as fill’d sponges”. Since Jahangir was neither the first nor the last ruler to regard his merchant community in that manner, local businessmen in turn developed an acute aversion to any public knowledge of their wealth.
Now review our history from 1947 onwards, and it is evident that the ingrained hostility of Pakistan’s business community towards the government has been reinforced on a constant basis. For local businessmen, modern history begins with land reforms under Ayub. Then came the nationalisation of industries, both big and small, by Bhutto Sr. That was in turn followed by our ‘decade of democracy’ in which our rival leaders fought each other via statutory regulatory orders. And then the coup de grace, the NAB Ordinance of 1999, in which it became a crime to default on any loan, even any government utility bill, for any or no reason whatsoever.
The net result is that our business community has developed the financial equivalent of Tora Bora, impervious to whatever ‘daisy-cutters’ may be dropped on them by the marauding forces of the finance ministry. Many businesses thus operate on the basis of word of mouth advertising, family relationships, cash payments and sanctions delivered by large gentlemen with cauliflower ears. More importantly, such businessmen also tend to keep their wealth hidden, either in the form of cash or gold. Finally, even to the extent they own land, it is most often held benami through intermediaries.
In social terms, the fundamental problem with a wealth tax is that it both invites and rewards lying. In the recent wealth tax return filed by Shahbaz Sharif, the claim that one of his wives owns exactly zero jewellery has been met with widespread sniggering. I have no knowledge one way or the other and I hasten to add that the lady in question may well own zero jewellery: My only point is that nobody knows and nobody will ever know. Which is a hell of a dumb basis on which to establish a tax law.
The final problem with a wealth tax is the mobility of capital; which is a fancy way of saying that if the government taxes my wealth here, I can just as easily shift my wealth to places which don’t tax my wealth (and which don’t ask questions either).
In times gone by, the difficult part was getting the money out of Pakistan and in monitoring one’s overseas investments. Hiding money overseas was thus the prerogative of particularly rich people who could afford to fly out of Pakistan (and get visas). The average rich guy was stuck here.
All of that has changed. Despite everybody’s best efforts, getting money to Dubai is a piece of cake. Buying property in Dubai is a piece of cake. And getting yourself to Dubai is also a piece of cake.
To put this in practical terms, suppose I have money to invest. If I put it into a bank, the tax-wallahs will hound me to hell and beyond as to how I made that money. If I buy a plot, I can hold it benami but that tends to produce litigation in the long run. But if I go to my friendly real estate agent, my money disappears, I get a good excuse to visit Dubai and nobody gets to ask me any questions. Which option would you take?
Nobody likes paying taxes. Consequently, people only pay taxes when they are forced to. In Pakistan, given our current legal system, trying to force people to pay a broad-based tax on wealth is simply not possible (beyond a certain degree). I understand Mosharraf Zaidi’s point that a wealth tax is more equitable than any other available option; but we’re not dealing with equity here. The only question is what works, not what feels good.
Published in The Express Tribune, June 28th, 2011.
Let us start with theory first. Wealth is not just an accumulation of money; it represents accumulated savings. Savings are good because when those funds are made available to banks, they get redistributed into loans and credit for entrepreneurs which, in turn, is good for the economy. In other words, there is a direct link between public savings and the amount of liquidity in the economy.
The chain of events I posit above is actually easier to understand in reverse. Nobody disputes the fact that easy credit is good for business. Self-evidently, if people don’t put their money into banks, banks will have less money to dish out. And if people are going to get taxed for keeping their money in banks, then they will indeed be less likely to keep their money in banks. To put it another way, why would you keep your money in a bank (rather than under your mattress) if you knew the government would take some of the money you keep in the bank?
The short answer is that Pakistan is not the same as many other countries. Our legal and regulatory framework is a particularly toxic mess and, unlike India, our deep history of mistrust between the business community and the state has only been reinforced since independence, not mitigated. Finally, the mobility of capital in today’s world means that a wealth tax is not just useless but actively harmful.
Edward Terry, an English clergyman at the court of Emperor Jahangir, remarked acidly some 400 years ago that while there were many rich businessmen in the lands of the Great Mughal, “it is not safe for them... so to appear, lest that they should be used as fill’d sponges”. Since Jahangir was neither the first nor the last ruler to regard his merchant community in that manner, local businessmen in turn developed an acute aversion to any public knowledge of their wealth.
Now review our history from 1947 onwards, and it is evident that the ingrained hostility of Pakistan’s business community towards the government has been reinforced on a constant basis. For local businessmen, modern history begins with land reforms under Ayub. Then came the nationalisation of industries, both big and small, by Bhutto Sr. That was in turn followed by our ‘decade of democracy’ in which our rival leaders fought each other via statutory regulatory orders. And then the coup de grace, the NAB Ordinance of 1999, in which it became a crime to default on any loan, even any government utility bill, for any or no reason whatsoever.
The net result is that our business community has developed the financial equivalent of Tora Bora, impervious to whatever ‘daisy-cutters’ may be dropped on them by the marauding forces of the finance ministry. Many businesses thus operate on the basis of word of mouth advertising, family relationships, cash payments and sanctions delivered by large gentlemen with cauliflower ears. More importantly, such businessmen also tend to keep their wealth hidden, either in the form of cash or gold. Finally, even to the extent they own land, it is most often held benami through intermediaries.
In social terms, the fundamental problem with a wealth tax is that it both invites and rewards lying. In the recent wealth tax return filed by Shahbaz Sharif, the claim that one of his wives owns exactly zero jewellery has been met with widespread sniggering. I have no knowledge one way or the other and I hasten to add that the lady in question may well own zero jewellery: My only point is that nobody knows and nobody will ever know. Which is a hell of a dumb basis on which to establish a tax law.
The final problem with a wealth tax is the mobility of capital; which is a fancy way of saying that if the government taxes my wealth here, I can just as easily shift my wealth to places which don’t tax my wealth (and which don’t ask questions either).
In times gone by, the difficult part was getting the money out of Pakistan and in monitoring one’s overseas investments. Hiding money overseas was thus the prerogative of particularly rich people who could afford to fly out of Pakistan (and get visas). The average rich guy was stuck here.
All of that has changed. Despite everybody’s best efforts, getting money to Dubai is a piece of cake. Buying property in Dubai is a piece of cake. And getting yourself to Dubai is also a piece of cake.
To put this in practical terms, suppose I have money to invest. If I put it into a bank, the tax-wallahs will hound me to hell and beyond as to how I made that money. If I buy a plot, I can hold it benami but that tends to produce litigation in the long run. But if I go to my friendly real estate agent, my money disappears, I get a good excuse to visit Dubai and nobody gets to ask me any questions. Which option would you take?
Nobody likes paying taxes. Consequently, people only pay taxes when they are forced to. In Pakistan, given our current legal system, trying to force people to pay a broad-based tax on wealth is simply not possible (beyond a certain degree). I understand Mosharraf Zaidi’s point that a wealth tax is more equitable than any other available option; but we’re not dealing with equity here. The only question is what works, not what feels good.
Published in The Express Tribune, June 28th, 2011.