Usurping incentives for more taxes?
“And you can’t have a prosperous economy when the government is way overspending, raising tax rates, printing too much money, over regulating and restricting free trade. It just can’t be done”—Arthur B. Laffer
“The Laffer Curve, by the way, was not invented by me; it has its origins way back in time. For example, the Muslim philosopher Ibn Khaldun wrote in his fourteenth-century work The Muqaddimah: It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessment”—Dr. Arthur B. Laffer, known to have invented Laffer Curve, has made this observation in his book, Return to Prosperity: How America Can Regain Its Economic Superpower Status (2010),coauthored with Stephen Moore, senior economics writer for the Wall Street Journal
Among the many surprises, rather shocks, that the budget 2023 presented by the coalition government of Pakistan Democratic Movement (PDM) has given to the people, are withdrawal of a few incentives, the brunt of which is directed principally to the salaried class. As it is, there is no scope of claiming any expenditure against income from salary and whatever few tax credits like ones related to payment of premium for life insurance, purchase of shares through Initial Public Offering by listed companies, senior citizen allowance, disabled person allowance, 25% tax credit for teachers/researchers, navigation/submarine allowance at reduced rate of tax etc.; have already vanished from the Income Tax Ordinance, 2001, (ITO) a law that is getting more and more complicated, incomprehensible and highly oppressive with the passage of time. Besides, being in English, it is beyond reach of the majority that is ignorant about the many crooked provisions regarding law and procedure applicable to it. Consequently, this verbose literature is just a pile of papers which has no bearing on either ground realities of this country or mindset of the population.
World renowned economist and tax guru, Arthur B Laffer, who has benefitted many governments with his valuable advice on tax matters, has been consistently canvassing against imposition of unholy taxes and retracting tax incentives for the common man. He says: “Because tax cuts create an incentive to increase output, employment, and production, they also help balance the budget by reducing means-tested government expenditures. A faster-growing economy means lower unemployment and higher incomes, resulting in reduced unemployment benefits and other social welfare programs”.
Quoting the example of Estonia from European Union Laffer explains: “In 1994, Estonia became the first European country to adopt a flat tax, and its 26 percent flat tax dramatically energized what had been a faltering economy. Before adopting the flat tax, the Estonian economy was literally shrinking. In the eight years after 1994, Estonia experienced real economic growth – averaging 5.2 percent per year”.
Unfortunately for Pakistan successive governments have proved utter failure in enforcing their income tax law based on so-called progressive rate of tax nor have they bothered to pay heed to our suggestions in twice printed version of the book: “Towards Broad, Flat, Low-rate and Predictable Taxes” by Dr. Ikramul Haq and this scribe. On the contrary, revenue authorities view its contents as a threat to their discretionary powers and corrupt practices. The thought that people would automatically and happily be drawn to paying their taxes that would bring in substantial inflow of revenues for cash-starved governments, is blood curdling for them. Independent surveys and discussions with top-notch members of the business classes reveal that they will be more than willing to share their wealth and income provided they are not subsequently harassed by officials of the revenue department and are not compelled to carry out obligations of massive withholding taxes on their behalf. They openly say that their focus is on earning profits but not at the expense of futile litigations and efforts to appease the ever-famished revenue bureaucracy. Simple and straight-forward system as exists in civilized countries is what they are aspiring for but their political representatives are too ignorant to pay attention to their demands.
Taking a cue from the worthwhile work of Dr. Laffer and his infamous Laffer Curve that illustrates the basic idea that changes in tax rates have dual effects on tax revenue where one is arithmetic (amounts expected/received) and the other is economic; one can say with confidence that the present laws and system have neither brought in sufficient revenue nor have they left any significant footprint on the economy. The fact is that presently, the country is in dire straits from which no respite seems to be in the offing because those at the helm of affairs lack both initiative and vision.
Just as congeniality attracts friends, it is important to remember that taxes can be coaxed out of people through tenderness and not by repression. “People can change the timing of when they earn and receive their income in response to government policies”, says Dr. Laffer and which is proved correct in our case where despite possessing knowledge of 43 million potential taxpayers but non-filers, the revenue authorities have failed to bring them in the tax net. Reasons could be many but the prime ones remain the governments’ faltered fiscal policy, officials’ attitude towards complying taxpayers and the recurring flow of lousy amnesty schemes to help evaders decriminalize their ill-gotten wealth.
While in the case of the ordinary citizens, certain lukewarm incentives have been withdrawn courtesy budget 2023 with abolition of some sections and clauses in Part III of the Second Schedule to the ITO mentioned above, clause (27) [The tax on payments under the Compulsory Monetization of Transport Facility for Civil Servants in BS-20 to BS-22 (as reduced by deduction of driver’s salary) shall be charged at the rate of 5% as a separate block of income] of Part II of the Second Schedule continues to be retained because its benefit is directly enjoyed by elite members of the bureaucracy. So where monetized perquisite in the form of vehicles are added to the taxable incomes of private employees, high ranking government servants get the advantage of reduced rate of tax on the same perk.
The most disgusting amendment pertains to withdrawal of tax credit (that was already curtailed to 25% from 70% when first introduced) to salaried teachers/researchers under set conditions. Due to the low pay and poor status assigned to it, not many take up teaching/research as a regular profession. A tax cut was perhaps a good enough incentive to lure people towards it but this is no longer available.
Tax laws are the backbone of a country’s economy and vital source of revenue for the governments that must be made with complete seriousness keeping ground realities in mind. As Dr. Laffer aptly puts it: “Raising taxes is not a frivolous venture that you do on the editorial page of ‘The New Republic,’ for god sakes. It’s something that you really have to think about and go through carefully.”
The writer, lawyer and author, is an Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Senior Visiting Fellow of Pakistan Institute of Development Economics (PIDE)