Dealing with Pakistan’s tax problem

Pakistan’s extremely low tax to GDP ratio (between 10 and 15 per cent, depending on what revenue is measured) has been cited by many inside and outside the country as one of the main problems of the country. With low tax collection, and thus low tax revenue, the government is forced to borrow too much, look abroad for aid, force its central bank to print too much money, and forced to reduce spending on development and reduce the quantity of public goods provided to the public.
Pakistan Tehreek-e-Insaf’s (PTI) leader, Imran Khan, has made this a central plank of his economic policy. Many feel that such reforms are impossible in a country like Pakistan, and historically, many governments have indeed failed at such reforms. However, I believe that this task is most certainly within the realms of the possible, and will explain below various, relatively simple steps that can be taken to achieve this goal.
When approaching this issue, the first question we need to ask is: why do Pakistanis not pay taxes?
First, there is a strong, and quite well-founded belief, that a large part of the tax collected will not be spent on the welfare of the public at large, but rather on the politicians’ personal needs/wants, or the needs/wants of these politicians’ favourites. Second, due to the above problem, people simply do not expect that paying taxes will lead to any increase in the quantity and quality of public goods and services provided by the state. Hence, they have nothing to gain from paying taxes. The solution to this problem, while obviously not easy, does not require any new fundamental breakthrough in technology or human thinking in general. Decent governance, careful planning, and honest work are all that’s needed. While one has to admit that even these relatively basic changes will take time in Pakistan, it’s nevertheless nothing that cannot be done. It’s simply a matter of will, and time.
What must a government do to achieve this goal?
First, make clear, credible promises for improvements and increases in public goods and services: infrastructure, public transportation, education, health, social security. If people see improvements in their standard of living by paying taxes, they’ll be more inclined to pay. Governments should show people that if they pay more through taxation, then their expenses will be reduced by the state, in some way, through cheaper education or healthcare, for example. Hence, taxes won’t simply be reducing the disposable incomes of people, but also a way of increasing the disposable incomes, through a reduction in expenditures on private purchases of traditionally public goods and services. This is directly linked to the above point on higher, better provision of public goods and services.
Second, governments should be more transparent about how much tax is collected, from whom it is collected (geography, profession-wise), and where it is eventually spent. This will instill greater confidence among the public in the government’s initiatives, such as the ones listed above. It can also be useful in ensuring greater equality in terms of the tax burden, so that one powerful group does not evade taxation easily, while the less resourceful continue to pay fully. This is in fact the situation right now.
Third, ensure that filing in taxes is easy, and that help is available for those finding it difficult. Make tax evasion hard in the first place. This can be done by ensuring cross-checks between various data between agencies, and different levels of administrative (local, provincial, federal, etc). Penalties for tax evasion must be swiftly implemented without fear or favour. An honest, competent bureaucracy, including the police service, would be a great help here. Currently, the penalty for not paying tax is not high. Some groups simply aren’t touched as they are seen as too close to those in power, and others as being too powerful in themselves (some professional groups with strong unions, for example). Otherwise, you simply pay a bribe to get out of paying taxes.
Fourth, reduce the tax burden on the lower and middle classes. This can obviously be done by lowering the income tax rate, but also by shifting the focus of taxation from indirect, consumption taxes to wealth taxes. Such a reduction, from a pure tax collection perspective, can be beneficial by giving people a much greater incentive to pay tax, instead of trying to evade it. It’s very much possible that the government may collect more tax revenue at lower rates but higher compliance, as compared to higher tax rates, but higher evasion as well. If all imposed taxes are paid, the result will also be a more equitable situation, as the ‘resourceful’ won’t be able to dodge the taxes at the expense of the ‘poor’.
Fifth, increase the tax net to include untaxed and low taxed activity, such as agriculture. Apart from the above measures, the government can sell these reforms by explaining to the people that the high rate of inflation is due to some fundamental issues in the agriculture market, some malfunction in markets (cartels) and the state bank printing too much money. The last problem can be dealt with by reducing money printing through higher tax revenue and a reduction in borrowing needs. A major problem of the government and the public will be solved this way. This will provide yet another boost to the purses of ordinary Pakistanis.
On a more purely political front, this initiative can be linked to ensuring that Pakistan is sovereign, that it can pursue its own interests domestically and internationally without fear that its arm can be twisted by countries providing any aid. These measures, if carefully, clearly and systematically implemented should most certainly ensure that Pakistan collects more tax and governments are truly able to serve the people. It is simply a matter of will.