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 a very few 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] released/launched by Oxfam on January 22, 2020 when political and business elites 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 a classic example of it. The following facts highlighted in Reward Work, Not Wealth  are eye-openers:

• “Billionaire wealth has risen by an annual average of 13 percent since 2010–six times faster than the wages of ordinary workers, which have risen by a yearly average of just 2 percent. 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 a global tax of 1.5 percent on billionaires’ wealth could pay for every child to go to school.

In Pakistani context and some other countries, the following aspects highlighted by Oxfam in,   ‘Time to end extreme inequality’,need special attention:

• “Researchers have shown that, across the 21 countries for which there data is available, there is a strong correlation between extreme inequality and low social mobility. “In Pakistan, for instance, a boy born in a rural area to a father from the poorest 20 percent of the population has only a 1.9 percent chance of ever moving to the richest 20 percent” [S. A. Javed and M. Irfan (2012) ‘Intergenerational Mobility: Evidence from Pakistan Panel Household Survey’].
• Elites, in rich and poor countries alike, use their heightened political influence to curry government favours – including tax exemptions, sweetheart contracts, land concessions and subsidies–while blocking policies that strengthen the rights of the many. In Pakistan, the average net-worth of parliamentarians is $900,000, yet few of them pay any taxes that  undermines investment in sectors, such as education, healthcare and small-scale agriculture, which can play a vital role in reducing inequality and poverty.
• At the same time, poor people are hit hardest by petty corruption, which acts as a 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 percent of the time, whereas for the non-poor this figure was just 4.3 percent”.
• In Pakistan, sending all children to ‘Low-Fee Private Schools’ (LFPS) would cost approximately 127 percent of each household’s income. The trends are similar in Malawi and rural India. Poor families will also often ‘hedge their bets’ by prioritizing one or two children and it is usually girls who lose out. A study in India found that 51 percent of boys attended LFPS, compared with just 34 percent of girls”.

InPakistan@100 From Poverty to Equity [World Bank, Policy Note, March 2019], it is highlighted that  revenue-collection side, expanding the tax base should be achieved at the same time as reducing inequities (such as exemptions, preferential treatments to some sectors, and outdated property valuation tables) and the overall progressiveness of the tax system. In terms of public spending, a greater focus should be devoted to transitioning from a system of universal subsidies, which is inherently regressive, to one in which transfers are targeted to vulnerable segments of the population only. Such a policy shift will not only save Pakistan’s government a substantial amount of resources, but it will also reduce inefficiencies and distortions that curb investment and growth, encourage efficient and sustainable use of resources, and discourage unproductive rent-seeking behaviors. Increasing progressivity of spending should go hand in hand with correcting imbalances between capital and recurrent expenditures, improving operational efficiency, and strengthening accountability to ensure higher spending translates into better services for the poor and, ultimately, better outcomes on the ground. Efforts to mobilize resources and improve the system’s progressivity should be anchored on solid analytical foundations to prioritize areas of intervention, and assess the scope and impact of proposed reforms”.

Time and again in these columns, it is pointed out that a critical aspect of Pakistan’s tax system that is also ignored by Oxfam that is highly pro-rich character. It inflicts fiscal injustices by providing privileges to a select group and places a disproportionate burden on the majority of people. This system is not only creating monstrous tax debt burden reached nearly Rs. 33 trillion at the start of 2020. Besides, increasing huge fiscal deficit it is also fueling poverty.

The Great Divide in today’s Pakistan relates not only to urban-rural but also to income and wealth disparities. The wealth of the nation is confined to a few families. The main burden of taxes—70% collection is from indirect taxes—is on the less privileged classes and the rich are not even ready to share a very negligible portion of their collossal wealth with the have-nots.

The donors and lenders, International Monetary Fund (IMF), Asian Development Bank (ADB), the World Bank (WB) and Department for International Development (DFID), hardly mention the oppressive nature of our tax system and apathy of federal and provincial governments to provide public services. They are very fond of discussing ‘low-tax-to-GDP ratio’ without pointing out where the taxpayers’ money goes to. Not a single report/study of these agencies/bodies mentions that the ruling elites-real beneficiaries of tax money-also thrive on funding/aids/grants/loans extended by them. Our current tax system provides enormous benefits and luxuries to elites and shifts the burden on the common citizens, especially having the meagre earnings. Presently both the provinces and federal government is collecting sales from restaurants that is not only exorbitant—above 20% accumulatively—but also evaded massively.

When the IMF, ADB, the WB and DFID abuse poor Pakistanis of not paying taxes, they conveniently ignore that over 95 million unique mobile users are paying 12.5% advance, adjustable income tax to the Federal Board of Revenue (FBR) and high sales tax to provinces! Majority of these have below taxable income!! Taxpayers and people of Pakistan are justified to pose a question: Can you please first identify the real beneficiary of taxpayers’ money and cost to national exchequer in providing free perks 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? This is increasing inequalities. Now even many of 75 withholding are full and/or final or minimum thus allowing the rich shift of so-called direct taxes to the weaker segments of society.

Billions collected as super tax, imposed under section 4B of the Income Tax Ordinance, 2001, for rehabilitation of Internally-displaced Persons (IDPs) never reached them. Can the Government explain the reasons for perpetual plight of IDPs and the poor despite super tax imposed since in 2015 but later extended?

The income inequalities in Pakistan have increased sharply since 1977 and the trend continues unabated despite tall claims of poverty reduction by official quarters. 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 (35%) while the rich are paying no tax on their colossal incomes and wealth—in their case tax burden has decreased by 18% for the same period. Study of Pakistan from this political economy perspective is very crucial as our society is fast moving towards dehumanizing characteristics, unfettered and unchallenged. We are facing economic disparities, undernourishment, starvations, scarcity of eatables and lack of essential services. 

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