Taxation of regression

In traditional development theory, it is said that a government will only feel responsible towards its citizens, if it can be held accountable before them; one of the measures of accountability being the depth of tax collection within the economy. In Pakistan, the tax to GDP ratio is unendingly lamented. Staggering between 9-11 per cent, any attempts to pull or push it upwards in recent years have dramatically failed on account of the government’s predilection towards retaining its precarious constituency rather than watering the scorched roots of this country.
The more depressing picture gets unveiled once taxes and their respective payers are examined at the micro level. The total tax budgeted for FY12 amounts to Rs2.1 trillion. Of these the more pertinent sub heads that apply to the masses in general are the income and sales tax where it is envisaged that Rs633 billion and Rs675 billion will be collected respectively.
To roughly examine how these amounts will be raised, consider this. The total estimated population of Pakistan stood at 177 million during 2011.Of this, about 65 million reside in urban areas which can said to be the primary points of collection in Pakistan given that the agriculture sector is largely untaxed. Given Pakistan’s overall dependency ratio, where 47 per cent of the population lies above the 20 years age bracket, the total number of adult income earners arrives at about 31 million people only. Thus, ignoring the fact that grave income disparities exist in the country, the sales tax per capita arrives at about Rs20,000 per year. Conjectures regarding the number of people living below the poverty line range between 40-75 per cent. Living on less than USD2/day translates into living on Rs63,000 annually. Thus, an average adult pays in the low income bracket about one third on his income on sales tax, ie items he consumes in a year. In comparison, considering the average income per capita stands at about Rs300,000 per year, the estimated sales tax paid by an individual in the middle income bracket only forms about six per cent of their income, clearly making an empirical case for the regressive nature of indirect taxes.
On the income tax front, reports show that registered tax payers form only 1.6 per cent of the population. Common sense would easily tell that people from the middle class, who usually work as ‘employees’ within organisations receive salaries post tax deductions and thus have no control over any form of tax evasion. Further, according figures stated by the FBR only 10,000 tax payers pay taxes above a million rupees in taxes, their total contribution amounting to about Rs46 billion (Rs24 billion by individuals and Rs22 billion by corporations) only. Calculations derived from the Gini Coefficient show that income of the richest 20 per cent stand at about 41 per cent of the total income which makes about Rs4-4.5 trillion as of 2011. Thus, taxes paid by the rich as a proportion of their income stand at 10 per cent in gross terms and 5 per cent if the amount paid by individuals only is taken into account.
As evident from this, ‘overhauling’ of the tax system would imply that the first much needed step would at least tax the rich in the same proportion as people in other income brackets if not more. Maybe the much criticised RGST is a remedial answer to the woes of the fiscal authorities. However, as inputs get taxed increasingly, the translation of higher taxes into prices would once again feed in to the already mounting dissent in every nook of the country.
Where then do the answers lie? While capitalism has fed the dreams of many, it has proven to be fatal for egalitarian sentiments in this part of the world. Will the plight of the poor ever make it to the national agenda?
The writer is an economic researcher and freelance journalist