Daily Times

One of many factors for increased income and wealth inequalities in Pakistanis regressive and unjust taxation benefitting the rich and hurting the less-privileged segments. Incidence of taxes on the poor after presumptive taxes, imposed and enhanced perpetually since 1991, has increased substantively (38 percent in 15 years), while on the rich it has decreased by 21 percent for the same period. Since the coup d’état of July 5, 1977, regressive taxes have gradually replaced progressive ones, even under so-called civil dispensations.

The real brunt came in 1991 under first premiership of Nawaz Sharif when for the first time, presumptive taxes, indirect in nature, were made part of income taxation, facilitating the businessmen to pass the burden onto the end consumers. In addition, the criminal, tax evaders and looter of national wealth got Protection of Economic Reforms Act, 1992 to whiten the dirty money. This not only eroded the tax base but also helped many, including the house of Sharif, to shift untaxed money abroad, and the rich and mighty till date enjoy the unprecedented opportunity to decriminalise their untaxed money under this obnoxious law.

The final nail in the coffin of progressive taxation came during Musharraf-Shaukat era when wealth taxation was abolished and personal income tax rates were slashed for the rich. After the 18th constitutional amendment, the right to levy progressive taxes like gain on immovable property, estate duty, wealth tax on immovable assets and gift tax was transferred to the provinces and since 2010, not a single province has availed the same to increase their resources and spend the money for public welfare, wealth redistribution and alleviating poverty. Shockingly, the capital gains on disposal of immovable property, though provincial subject is encroached upon by the federal government and none protested.

The rich-poor divide in Pakistan, among many other factors has its roots in regressive taxation. A study conducted by Talat Anwar provides estimates of various inequality indices in Pakistan wherein the Lorenz Curve and Gini Coefficients have been most commonly used. This study confirms that income inequality in 2000-2007 had been the maximum compared to any time period in the history of Pakistan. The poorest 30 percent lost their share while the richest 20 percent gained in both the urban and rural areas. This study also notes that good policies without good governance can never benefit the poor. “In Pakistan the periods of highest levels of resource allocations did not result in improvement in social indicators underlining the fact that spending money without addressing the underlying structural causes of poverty will not reduce poverty”, the study says.

Transparency of public sector expenditure and accountability in resource allocation therefore was of foremost importance. Political accountability was also essential to eradicate bad governance practices. Secondly, regressive tax structures followed by poorly constructed subsidies made for an inefficient system. There is a need for correct and efficient targeting of subsidies. Poor governance structures exacerbated leakages and missed targets, completely sidelining the poor even from accidental benefits, the study suggests.

The state needs to end inequalities and ensure fair and equitable allocation of resources as part of tax reforms agenda. The foremost objective of rational and just tax system should be collecting funds for public spending and providing basic facilities of health, education, transport, housing and recreation to all citizens. Taxation should not be meant for favouring somebody or penalising a segment of society. It should be for the common good, for welfare of all, for establishing an egalitarian state.

The final nail in the coffin of progressive taxation came during the Musharraf-Shaukat era when wealth taxation was abolished and personal income tax rates were slashed for the rich

It is highly lamentable that millions of Pakistanis are living below the poverty line but huge amounts are spent on personal comforts and luxuries of the president, prime minister, governors, chief ministers, ministers, state ministers and high-ranking civil-military officials. Unfair tax system, like the one prevailing in Pakistan, promotes inequalities. Wealthy individuals escape taxes, and burden is shifted to ordinary citizens through taxes on labour and consumption. As a result, wealth and power are being increasingly concentrated in the hands of a few — even less than one per cent of the population of Pakistan.

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/expenditure structure of the government. In Pakistan, on the contrary, the single most devastating factor for increased income and wealth inequalities remains the regressive taxation. Study of Pakistan from this political economy perspective is very crucial as society is fast moving towards dehumanising characteristics due to income/wealth disparities and rising poverty.

The great divide in today’s Pakistan between the rich and the poor is assuming alarming proportions and one of the main factors for this is lack of political will to tax the people according to their ability to pay. The way forward is implementation of Article 3 in letter and spirit. Taxation system should conform to the principles enshrined in this and other related articles of the constitution to ensure fair and just socio-economic order. Fair taxation alone can ensure growth, employment and equity.

The writer is Advocate Supreme Court and Adjunct Faculty at Lahore University of Management Sciences (LUMS). Email:ikram@huzaimaikram.com; Twitter: @drikramulhaq

Published in Daily Times, July 2^nd, 2017.