Will the salaried class always have to struggle?
FBR considering charging higher rates of income tax from those who are outside the tax net. PHOTO: REUTERS
The salaried class is typically considered the backbone of a growing economy, as these individuals contribute to the growth engine through their daily 9-5 (or sometimes longer) routine.
However, in Pakistan, these individuals seem to lack representation. While traders and exporters have their concerns heard and concessions granted, the salaried class – the direct taxpayers – have no such voice.
Let’s look at some statistics to put things in perspective: Pakistan’s tax-to-GDP ratio currently hovers around 4-5%. Assuming optimistically that only half of the economy is undocumented, the GDP is understated by 50%, and hence this ratio falls to almost 2-2.5% in reality.
This means that on average, a Pakistani pays only 2-2.5% of their income in the form of total (direct + indirect) taxes. However, the salaried class is treated very differently, with the highest tax bracket going as high as 35%.
A mid-level career professional in Pakistan generally falls within the tax bracket of 25-30%. When indirect taxes such as GST and petroleum levy are included, they end up paying almost 50% of their salary as taxes. This is in stark contrast to the average Pakistani who only pays a total of 2.5% in total taxes.
Moreover, with skin piercing inflation, the plight of the salaried class becomes even more pressing. During inflationary periods, businesses typically transfer the maximum possible impact onto consumers through price hikes. The extent to which they can do so depends on the price elasticity of demand for their product.
For products with perfectly inelastic demand, the majority of the inflationary pressure is borne by customers. However, for products with relatively elastic demand, the inflationary pressure is shared between consumers and producers through higher prices.
But what recourse do the salaried individuals have? None. In times of inflation, they have to make do with paltry salary increases, and when this inflation triggers a recession, business owners often resort to layoffs as the easiest and quickest way to cut costs. The salaried class loses once again.
However, this situation is not sustainable. Forward-thinking countries already understand the undeniable importance of salaried individuals in a growing economy. For instance, in the United Arab Emirates (UAE), the salary multiple for a professional with similar credentials to their Pakistani counterpart is currently five to six times higher. As a result, many individuals are leaving Pakistan and flocking to the Gulf.
The UAE government has also incentivised freelancers to operate from Dubai by offering them golden visas. But why do you think they are doing it? They understand the crucial fact that human resources are the most valuable resource in modern times.
Today’s iconic companies such as Google and Facebook are the result of unleashed potential from talented individuals, not the extraction of oil, mining of diamonds, or manufacturing of steel. Therefore, these companies are willing to offer extremely attractive salaries to these talented professionals.
In Pakistan, however, we have a stark contrast. The salaried class is taxed much more than others and paid much less. It has become virtually impossible for salaried individuals to afford a house and own a decent car, making these things out of reach for them. It is very challenging for these individuals to make ends meet.
Due to the aforementioned reasons, talented professionals are leaving the country and seeking opportunities elsewhere. Human capital is flying out, along with the money they can make and if these flights continue to leave, the loss could become irreversible.
Policymakers must wake up and take action. The individuals leaving are typically hardworking, law-abiding citizens who contribute significantly to the country’s economy by paying taxes.
They play a crucial role in maintaining the social fabric of the nation, and the success of many corporations is due in large part to their skills and knowledge.
If their concerns are ignored and their silence misconstrued as an inability to retaliate, it could have severe consequences for society as a whole. Businesses will struggle to find skilled labour and managers, and the country may lose loyal and reliable taxpayers. This loss would be the true ‘gloom and doom’ scenario for the country.
The writer is a banker and teaches economics
Published in The Express Tribune, April 17th, 2023.
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