Oppressive taxes & rich-poor divide

Dr. Ikramul Haq

The world’s 2,153 billionaires have more wealth than the 4.6 billion people who make up 60 percent of the planet’s population—Oxfam’s report, ‘Time to Care’, published on 20 January 2020.

In Pakistan, the average net worth of a parliamentarian is $900,000, yet few of them pay taxes. Instead, elites in parliament exploit their positions to strengthen tax loopholes—Fair Taxation For Poverty Reduction And Equality (Huzaima& Ikram, 2016).

Pakistan is among the countries where due to oppressive taxes, rent-seeking by elites, concentration of resources/wealth in a few hands and non-delivery of social services to the weaker segments of society, among other factors, have been contributing perpetually and substantially towards rich-poor divide for the last many decades. In other parts of the world, as per latest report [Reward Work, Not Wealth] launched by Oxfam on January 22, 2020 when political/business/elites were gathered for the World Economic Forum in Davos, Switzerland.    

The startling revelations, contained in Oxfam’s report, include among others, “how the global economy enables a wealthy elite to accumulate vast fortunes while hundreds of millions of people are struggling to survive on poverty pay”—Pakistan is one such example. The following facts highlighted in Reward Work, Not Wealth  are eye-openers:

• “Billionaire wealth has risen by an annual average of 13% since 2010–six times faster than the wages of ordinary workers, which have risen by a yearly average of just 2%. The number of billionaires rose at an unprecedented rate of one every two days between March 2016 and March 2017.
• It takes just four days for a CEO from one of the top five global fashion brands to earn what a Bangladeshi garment worker will earn in her lifetime. In the US, it takes slightly over one working day for a CEO to earn what an ordinary worker makes in a year.
• It would cost $2.2 billion a year to increase the wages of all 2.5 million Vietnamese garment workers to a living wage. This is about a third of the amount paid out to wealthy shareholders by the top 5 companies in the garment sector in 2016”.

In Pakistan and elsewhere, the areas of concern to bridge rich-poor drive is to “ensure the wealthy pay their fair share of tax through higher taxes and a crackdown on tax avoidance, and increase spending on public services such as healthcare and education”. The Oxfam has estimated that a global tax of 1.5% on billionaires’ wealth could pay for every child to go to school.

In Pakistani context, there are many disturbing factors as highlighted by Oxfam in Time to end extreme inequality’,for example, “a boy born in a rural area to a father from the poorest 20% of the population has only a 1.9% chance of ever moving to the richest 20%” [S. A. Javed and M. Irfan (2012), ‘Intergenerational Mobility: Evidence from Pakistan Panel Household Survey’]. Elites in Pakistan use their influence to obtain money whitening schemes, tax amnesties/exemptions/immunities, land concessions and subsidies—while blocking policies for providing basic entitlements to the millions of the downtrodden. In Pakistan, even the rich parliamentarians pay negligible taxes to fund education, healthcare and small-scale agriculture that can play a vital role in reducing inequality and poverty. Oxfam says that “poor people are hit hardest by petty corruption, which acts as de facto privatization of public services that should be free—one study found that in rural Pakistan the extremely poor had to pay bribes to officials 20% of the time, whereas for the non-poor this figure was just 4.3%”.

Another sad fact is lack of governments’ will to fulfill the promise of free and compulsory education to all children of the age of five to sixteen years under Article 25A of the Constitution.  Oxfam has estimated that sending all children to ‘Low-Fee Private Schools’ (LFPS) would cost approximately 127 percent of each household’s income. In ‘Pakistan@100 From Poverty to Equity’ [World Bank, Policy Note, March 2019], it is highlighted that  “Pakistan is not increasing progressivity of spending, correcting imbalances between capital and recurrent expenditures, improving operational efficiency, and strengthening accountability to ensure better services for the poor”.

Time and again in these columns, the ruthless pro-rich character of Pakistan’s tax system is being pointed. It provides privileges to a select group and places a disproportionate burden on the majority of people. Anti-people and anti-growth policies are not only creating monstrous debt burden (total debt/ liabilities of  Rs. 44.49 trillion  in November 2019), but also pushing fiscal deficit to a new record  of over Rs. 3 trillion, debt servicing Rs. 3.4 trillion besides fueling poverty. The rich-poor divide is widening, not confined to urban-rural, everywhere in terms of incomes/wealth disparities. While enormous wealth is confined to a few, the main burden of taxes—70% collection is from indirect taxes—is on the less-privileged. The rich are not even ready to share some negligible portion of their colossal wealth with the have-nots.

The International Monetary Fund, Asian Development Bank, World Bank and Department for International Development in grants/aids/loans to seldom mention in their papers/studies the oppressive nature of our tax system and apathy of federal/provincial governments to ensure universal pensions and social services. They do not like Oxfam expose the elites—real beneficiaries of resources who thrive on taxes/aids/grants/loans. While, enormous benefits and luxuries to elites are tax-free, the exorbitant sales tax burden is on the common citizens with meagre earnings even on items daily use. Presently both the provincial and federal governments are collecting sales tax from restaurants that is not only exorbitant—above 20% cumulatively—but also evaded massively. No serious effort is made to quantify the real cost of taxpayers’ money in providing free perks/benefits to militro-judicial-civil-complex and public office holders in the form of palatial residences, army of servants, expensive cars, golf courses, rest houses, foreign tours, banquets, etc. The system is increasing inequalities yet about 75 types of withholding taxes are imposed, many full or final or minimum thus allowing the rich to shift the incidence of so-called direct taxes to the weaker segments of society and consequently becoming richer.

The income inequalities in Pakistan have increased sharply and the trend continues unabated despite tall claims of poverty reduction through initiatives like Ehsaas etc. The main factors that govern personal income distribution include: distribution of assets; functional income distribution; transfers from other households, government and rest of the world; and tax and expenditure structure of the government. The single most devastating factor for increased income and wealth inequalities remains the regressive tax system. Incident of tax on the poor since 1991 when regressive taxes replaced progressive levies has increased substantively (over 45%) while the rich decreased more than 30%— as State is not collecting due taxes on their colossal incomes/wealth by extending them amnesties/exemption/waivers. Resultantly, the rich-poor divide in Pakistan has assumed alarmingly proportions with more dehumanizing characteristics. The poor, overburdened with oppressive taxes, are deprived of nutrition, health, education and all universally-recognised basic entitlements/rights/facilities for decent living. 

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The writer, Advocate Supreme Court, is Visiting Faculty at Lahore University of Management Sciences (LUMS).