Tax dodging is rife among Pakistan’s 220 million populations; just 2.5% are registered within the tax system but fewer actually pay it. Pakistan is among the weakest performing countries in the developing world in terms of tax mobilizing public revenue efficiently from the taxation. However, despite the incessant efforts to revamp and revise tax structure of the country, it remains 10 percent of the total GDP. Failure to strengthen the tax culture has hobbled economic growth, bogged down social prosperity, and prosperity. The prevailing predicament of economy, burgeoning foreign debt, widening budget deficit, and burden of indirect taxes on the poor are some of the deleterious consequences of the ravaged tax system in the country. This tide can be turned by taking some structural policy measures to make the tax system more efficient ensuring it a major source of revenue for the fragile and unstable economy of Pakistan.
One of the latter-day practices is behavioral approach of tax policy. The behavioral approach of tax policy has been successfully adopted by not only the developed countries including United Kingdom, but also by the developing countries; for instance, by Kenya, and Rwanda. This approach considers the human tendencies to influence the behavior of the public. This is a rapidly growing area equally in developed and developing countries. This behavioral incentivization had become popular after the emergence of new concept of Nudge by a famous economists Richard Thaler (Thaler, 2018), and an administrative law expert Cass Sunstein. They basically pointed out that human choices can be influenced through feeding some additional information about economic, moral and, social decisions. This additional information that influences human behaviors called as nudging. They have made a point that small nudge can be important for the public policy. Therefore, this concept has got popularity amongst many public-policy makers around the world.
Several experiments have been conducted based on nudging. In 2004, the Costa Rican government collaborated with the World Bank to improve tax filing rates among 50000 non-filer firms. The experiment was successful and brought 20 percent more tax collection to the country’s national economy. Moreover, the tax-filing cases also increased to the extent.
Likewise, another successful experiment was conducted in Poland, where the Polish government with the collaboration of the World Bank sent behaviorally informed letters to late tax payers to ameliorate the tax compliance in the country. These behaviorally informed letters caused 20.8 percent increase in the number of compliant taxpayers. This experiment showed another interesting result that the women had a higher rate of repayment and they responded a hard-toned message. Similarly, countries such as Kenya, Kosovo and many other African countries have experimented the same and had achieved better results adopting this nudging concept of behavioral economics.
Withdrawal of the Statutory Regulatory Orders 2001 from the tax collecting institutions is essentially important to strengthen the tax system of Pakistan. These SROs give tax exemptions to some sectors and sub sectors.
Agriculture sector should also be brought under taxation in Pakistan and farmers need to be facilitated but land lords should be brought under taxation bracket. This is essentially important that the tax collection capacity by provinces need to be strengthened. There should be some sectors such as services tax must be collected by the provinces. It is noteworthy that, at present, there are some sectors for which provinces collect tax but the central government imposes restrictions as well. Therefore, it becomes demoting factor for the provinces to collect tax in spirit.
Ergo, the incumbent government which has been facing tumultuous and withered state of economy, has colossal opportunity to focus on policy pertaining to nudge in Pakistan for tax policy. In this regard, government needs to collect the data of firms and companies liable for tax. Government must initiate public service messages and thus using the social media and other tools of technology to nudge and to incentivize the public to ameliorate the tax system in this country.
Taking initiatives such as nudging the tax policy will, undoubtedly, bring better and effective results for the country’s revenue exponentially. The government can sparing its revenue by influencing people’s behavior, nudging government directives and actions, Moreover, it needs to initiate engaging businesses and the industrial units in nudging so that the tax policy can vitally be implemented in the country and the fragile economy of Pakistan may respite through its uneven and hard times.