The ways of Pakistan’s (non)-tax paying elite

Those with power and money have a vested interest in keeping things as they are, even if it holds the country back.

As you have no doubt heard by now, nearly 70 per cent of Pakistan’s lawmakers did not file a tax return last year. That means that, exempting their parliamentary salaries, which are automatically taxed by the government, they did not pay any tax at all. Many politicians have vast supplementary incomes from property, professional practices, and other sources. A 2009 study found that the average annual net wealth of a lawmaker in Pakistan ran into millions of rupees. Given that technically, any income above Rs500,000 should be taxed, that is a whole lot of lost tax money.

The release of this information, painstakingly compiled by investigative journalist Umar Cheema, has been covered by every major international newspaper and has prompted much discussion in the domestic media. But in Islamabad, there seems to have been limited political fallout. Parliamentarians, confronted with the evidence, have responded not with penitence or pledges to reform the broken system, but with flat out denial. Senator Ishaq Dar took issue with the use of the term “tax-dodger”, saying that it is “shameful that such language is being used for parliamentarians”. In a master class in how not to give a dignified response, the Senate accused the media of a conspiracy to malign politicians and vowed to investigate the tax affairs of media organisations, a childish tit for tat that serves no-one.

In 2009, the UK parliament was rocked by a similar scandal, when it emerged that MPs had been exploiting the generous system of expenses and allowances for personal gain. Backed into a corner, the prime minister, Gordon Brown apologised “on behalf of all politicians”. There were several high-profile sackings and resignations, MPs across the board were forced to pay back the money they had taken, and in some cases there were even criminal charges. The Times described it as “Parliament’s darkest day” and a “full-blown political crisis”. Those MPs that did complain of a media witch hunt were widely lambasted and forced to apologise.

By comparison, the attitude among Pakistan’s public to the latest revelations appears to be more resigned — yes, they’re dodging tax, but it’s no more than we expect. Why the drastically different response? The answer lies in the fact that of a population of 180 million, just 768,000 are registered to pay tax. That is less than two per cent. The vast majority of the population pay no tax at all, and many others are not paying as much as they should. Of course, the wealthiest are the worst offenders. Against this backdrop, the fact that parliamentarians are failing to pay tax is unsurprising: nor are businessmen, landowners, or bureaucrats. There is a long tradition of en masse tax evasion by the country’s elite.

However, to state the obvious, the fact that everyone is at it does not make tax dodging any less reprehensible. Just nine per cent of GDP is collected in tax each year, one of the lowest rates in the world. And Pakistan badly needs revenue. The state is heavily reliant on financial aid from the west and bailouts from international lending institutions. National debt stands at about 60 per cent of GDP, and the government has paid back just a third of the $7.5b that is due to the International Monetary Fund by 2015. With some justification, the population is widely suspicious of US involvement in Pakistan. Yet it is a statistic certainty that many of those complaining are not paying their taxes, thus undermining the best way to reduce reliance on American money.

While GDP figures are abstract, the brutal impact of the empty state coffers can be easily seen in any impoverished area of Pakistan. Last week, I visited Memon Goth, a village in Karachi. The school building stood empty. It was a government school, but there was no money to pay the teachers, so it was defunct and children could not attend. The story is the same across the country. Hospitals, schools, sewerage — these are the basic services which would be paid for by an effective state mechanism.

In any country in the world, the rich will do what they can to dodge taxes. In the aftermath of the UK expenses crisis, MPs may be on best behaviour, but corporations continue to find loopholes to avoid hefty tax bills. The problem in Pakistan is the huge accountability deficit in politics. This sense of impunity means that the Senate feels able to respond to serious allegations such as this with finger-pointing rather than an apology and a practical look at ways to improve the problem. This does nothing to help existing public disillusionment with the political system.

It is difficult to see how things will improve. It is a universal truth that raising taxes is unpopular. US President Barack Obama was forced to extend George Bush’s tax cuts for the wealthy during his first term because it was politically untenable to reverse them. The current proposal here in Pakistan is to offer an amnesty for tax evaders, with a one off payment of around Rs60,000. It is hoped that this will bring more people into the tax system. But as Pakistan gears up for a general election, will the ruling coalition really want to alienate large swathes of the population by forcing them to pay up? More to the point, will the country’s elites comply, or — as is usually the case — will they find a way to evade it, meaning that only the disempowered and lower-earning lose out, yet again? Existing laws are inconsistently enforced, so there is little reason to believe that new ones will be any different.

The problem is compounded by the fact that lawmakers and other powerful stakeholders are among the biggest beneficiaries of the current broken system. As Cheema’s report noted: “Those who make revenue policies, run the government and collect taxes have not been able to set good examples for others.” It doesn’t look like they are going to start any time soon. Those with the power and money have a strong vested interest in keeping things as they are — and if it holds back the development of the rest of the country, so be it.

Published in The Express Tribune, December 17^th, 2012.