Budget and social democracy

Does the budget 2011-12 adequately address the issue of broadening the tax base?

By Huzaima Bukhari and
Dr Ikramul Haq

Budget, an annual exercise of balancing the books, seems to bring no changes to the economic system in Pakistan, but certainly causes more hardships for the poor. Budget 2011-12 reflects that pattern.

Our budget makers could have followed social democracy model of Scandinavians that deplore extremes of wealth and poverty. But we prefer to follow the American Model, which promotes rich-poor divide and pays little attention for the welfare of the needy.

The Scandinavians, on the other hand, detest the idea that people should remain mired in poverty. They have initiated a number of welfare programmes by taxing the rich to help those lagging behind, enabling them to move ahead economically and socially. They impose high taxes on the rich to redistribute wealth and income in their societies. In Pakistan, the situation is exactly the opposite.

Our IMF-World Bank-imposed economic managers love to extend major economic benefits to the rich and their favourite recipe for growth is selling off profitable assets at throw-away prices to foreign investors.

Professor Ishtiaq Ahmad, in his article, “Towards social democracy” (The News, May 3, 2008) while emphasising the need for social democracy in Pakistan says “…the taxation system should be structured in a way that those who use the facilities of the state — its laws, rules and regulations, bureaucratic machinery, international contacts and facilities and other such services — pay more tax than those who do not. In such a tax regime notorious political-industrial families and other scoundrels would have no chance of tax evasion and there would be no room for contrived defaulters of bank loans. Also, the vast economic holdings and interests of the military should be brought under the jurisdiction of our tax system….”

The culture of favouring the rich, non-payment of taxes by the mighty, wasting of resources (both domestic and foreign) and looting of public money has led Pakistan to debt enslavement and political subjugation. The major reason for massive tax evasion has been lack of trust in the government — abuse of taxpayers’ money for personal comforts and luxuries by the ruling elite comprising indomitable civil-military bureaucracy and greedy politicians.

The State has failed to protect the life and property of the people, what to talk of providing them basic needs of health, education and civic amenities. The government’s yearning for “more taxes” has become a point of irritation for citizens who argue that mere collection of more taxes is no answer to existing maladies. The internal and external debt will keep on rising unless the government goes for all-out reforms.

Voicing this concern, Nadeem Ul Haque, Deputy Chairman Planning Commission, in his article, “Reform or face fundamental ascendancy”, observes, “The state must first provide the social contract, i.e., good law and order and security of life. It must dismantle the rent-seeking that protects the rich….. Rent-seeking relies on three main components: state subsidies, licensing and regulation; special perks and privileges for ministers and army and civil service employees and land distribution system that allows the poor man’s land to be acquired for the elite, especially the army and civil service”.

An equitable tax system is one under which tax payments are based on the amount of benefits received from government services — the Norwegian social democracy model is a good example to quote and follow. In social democracies, the cost of government services are apportioned amongst individuals according to the relative benefits they enjoy. In economic terms, this is called “benefit principle” that presupposes determination of the incidence of public expenditure before deciding distribution of tax burden.

Tax policy should be aimed at achieving the cherished goal of distributive justice. The government should launch programmes, financed mainly through taxes, to solve the twin problems of unemployment and poverty. These welfare-oriented schemes may also include subsidised/free medical and educational facilities, low-cost housing, and drinking water facilities in rural areas, etc.

Once people see the tangible benefits of the taxes paid, there will be better response to tax compliance. Taxes cannot be collected through harsh measures and irrational policies. The government must demonstrate to the taxpayers by its actions that money collected from them is spent for collective welfare.

Federal Board of Revenue (FBR) has failed to improve the tax-to-GDP ratio. It is going to further decline to 8 percent this year from existing 9.2 percent as FBR will not be able to collect even Rs. 1550 billion — the original target for fiscal year 2010-11 was Rs1680 billion which was later revised to Rs1580 billion.

In 2004, FBR promised 0.2 percent per annum growth in the tax-to-GDP ratio for the next five years while submitting ‘tax projections’ and ‘revenue-to-GDP ratio’ to the IMF on the conclusion of 9th review under the Poverty Reduction Growth Facility (PRGF). FBR informed IMF that it would increase tax-to-GDP ratio from 9.2 percent to 10.3 percent in 2008-09. In reality there was a decline of 0.4 percent.

Even the World Bank-IMF funding and “guidance” has failed to bring the desired results. Debt burden is increasing monstrously, fiscal deficit is still beyond control, inflation is crushing the poor, taxes are evaded and avoided on massive scales and whatsoever is collected is mercilessly wasted away.

The rich and the mighty not only evade taxes but also thrive at taxpayers’ expense. The government’s kitty is empty because of unwillingness of the rich to pay taxes, collossal wastage of taxpayers’ money on unproductive expenses and non-exploitation of vital natural and human resources.

Pakistan cannot come out of debt enslavement unless the governments — federal and provincial — tax the rich, confiscate untaxed assets and levy capital gains tax. The federal government has yet not withdrawn exemptions and legal ploys for whitening of black money, which confirms that rulers want to protect rent-seekers, money launderers, and tax evaders.

It seems there is nothing in the budget that ensures collection of taxes to the extent of Rs4 trillion — the real tax potential of Pakistan under the given economic conditions. This potential can increase manifold if we achieve rapid industrial and commercial growth, with overall economic growth rate of 7 percent to 9 percent during the coming ten years. Such a growth rate would not only increase tax-to-GDP ratio to 25 percent but eliminate our dependence on foreign and domestic borrowings. Collection of taxes, if properly made and utilised, can also reduce economic inequalities through redistribution of income and wealth — the cherished goal of social democracy for better human society, peace and tranquility.