Tackling income & wealth inequalities

Dr. Ikramul Haq

“We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both”— Louis Brandeis

“Where justice is denied, where poverty is enforced, where ignorance prevails, and where any one class is made to feel that society is an organized conspiracy to oppress, rob and degrade them, neither persons nor property will be safe”— Frederick Douglass 

Way back in 2012, the then Managing Director (MD) of Asian Development Bank (ADB), urged regional governments “to tackle rising income inequality with more urgency, warning any delay could undermine social cohesion and economic growth”. We paid no heed to it even after lapse of 12 years and now Covid-19 endemic has exposed the vulnerability of our State as failure to address this crucial problem has sparked, as predicted by ADB,  “further dissatisfaction leading governments to resort to populist measures to appease their citizens: These populist measures like fuel subsidies and cash grants, the MD of ADB warned, “are taxing on state coffers and could result in financial instability in the longer term”. This is exactly what we are witnessing in today’s Pakistan.   

Rising income and wealth inequalities in Pakistan are destroying the entire social fabric having critical political ramifications. Our policymakers have never bothered to address the problem and resultantly, successive governments, including the present one, forced to face greater pressure to adopt “populist policies”, as described by MD of ADB that are not “economically very wise because there is mounting pressure and for political reasons to start making concessions”. Had these inequalities been handled in time, we could have avoided the pressures facing now in the aftermath of coronavirus outbreak and lockdown making millions jobless and without enough to survive and nourish them and theri families, millions of children are undernourished.

There are many studies, some quoted in Covid-19, the poor & tax extortion, Daily Times, April 26, 2020 and Corona toll, negative taxation and charity, Daily Times, April 19, 2020 warning that rising wealth in the hands of a few is fuelling income disparities, with the underprivileged at risk of being sucked into a “vicious circle” of poverty and neglect. Measures were suggested for narrowing the income gap that would lead to reduction in subsidies and cash transfer programmes. Had this advice been implemented, this money could have been better spent on public health, education, social security, and in building human capital.

The following two points raised by ADP in 2012 are worth considering even today by all if we have to mitigate the economic impact of Covid-19 that may last for many years:

• Governments need to have better targeted social expenditures and social protection schemes.
• While they need to look at fiscal expenditures being made on the social expenditures, they should ensure that the subsidies are not too broad and that the tax bases are made broader.

In PTI’s failure on fiscal front, Daily Times, June 28, 2020, it was observed that the single most devastating factor for increased income and wealth inequalities remained the regressive tax system in Pakistan. Incidence of tax on the poor during the last 20 years has increased substantively (35%) while the rich are paying meagre tax on their colossal income and wealth—for them tax burden has decreased by 38% for the same period and if we take the effect of asset-whitening schemes of 2018 by Pakistan Muslim League (Nawaz) and in 2019 by coalition government of Pakistan Tehreek-i-Insaf (PTI), the benefit to the rich even crosses the mark of 60% of avoiding the actual incidence of tax, meaning that more concentration of wealth in their hands. Since General Zia’s take-over on July 5, 1977, regressive taxes have gradually replaced progressive ones—the real brunt came in 1991 when presumptive taxes were introduced and the rich got cover of laws like Protection of Economic Reforms Act, 1992 for hiding untaxed funds. The final nail in the coffin of progressive taxation came during the period of Musharraf-Shaukat when the rich were given exemption from wealth tax and capital gains as well as personal income tax rates were slashed for higher income earners—see details in the book, Pakistan: Enigma of Taxation.

According to UN Official report, from 1987-99 the Gini Coefficient for Pakistan was in the range of 0.33 to 0.43, which deteriorated to 0.68 in 2006, yet Musharraf and his “technocrat team” (sic) kept on claiming wonderful ‘economic turnaround” during their era. All the studies confirm that income inequality during 2000-2007 had been the maximum compared to any time period in Pakistan’s history. The poorest 30% lost their share while the richest 20% gained in both the urban and rural areas during Musharraf-Shaukat era.

All available data and studies confirm that rich-poor divide in Pakistan is increasing alarmingly. According to conservative estimates, 70% of population is poor in three broad categories, namely, ‘transitory poor’, ‘chronic poor’ and ‘extremely poor’. Transitory poor refers to those people who live below the poverty line for most of the time, but not always during a defined period. Chronic and extremely poor are those households that are always below the poverty line, all the time during a defined period. Similarly, on the other side, 11% and 19% of total non-poor (above the poverty line) have been classified as ‘transitory vulnerable’ and ‘transitory non-poor’, respectively. This portrays an alarming situation—more and more people are moving from transitory category to chronic category, courtesy regressive taxation, inequitable distribution of income and wealth, monopoly over assets by a few and wasteful expending by the government and now added factor of Covid-19 endemic. Since long, rulers in Pakistan—civil and military alike—have been showing extreme apathy towards the poor. They are not at all interested in providing economic justice to masses, and alleviate the poor from subsistence level.

Inequalities in income in Pakistan, as elsewhere, largely reflect inequalities in the distribution of assets. Since the poor have virtually no assets and the lower middle class own very few assets, income distribution is skewed. Distribution of state land; development of plots and houses for the common man at affordable prices and installments; the sale of shares of public enterprises in smaller lots; human resource development; and credit to the micro, small and medium enterprises are some of the ways that might help the poor in acquiring assets. However, the role of official bodies set up by federal and provincial governments in this regards, e.g. Benazir Income Support Programme, now renamed Ehsaas etc, are inadequate as well as not designed to improve social/economic mobility ending poverty trap.

The main factors that govern personal income distribution include distribution of assets as well as tax and expenditure structure of the federal and provincial governments. We will have to remove these fundamental structural flaws to end disparities and ensure delivery of essential social services. The Great Divide in today’s Pakistan between the rich and the poor is assuming horrifying proportions and needs to be addressed on a war-footing.

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