May 292015

One of the two speakers at a recent training session for the upcoming budget was a top-notch tax practitioner. He has held key advisory roles at the highest government level for almost two decades. Addressing the participants, he repeatedly called for more ‘equity’ in taxation, which means different tax rates for different people and sectors of the economy.

As for budget reporting, he was critical of journalists who, he believed, failed to take the government to task for not raising sufficient taxes. Although seemingly cliched, these two points hold the key to understanding the tax problem and are closely interlinked.

Consider this: the government misses its tax collection target every year, mainly because it fails to curb tax avoidance and tax evasion. Tax avoidance and tax evasion occur largely because of the complexity and loopholes in the tax code. These complexities owe their existence to politicians and the bureaucracy: they want to achieve the noble objective of general welfare by modifying the tax code for certain classes of citizenry in the name of creating ‘equity’.

So while pensioners expect some kind of relief in every budget, small investors want a tax break in the name of capital market development. Exporters demand a lower tax rate for the sake of promoting exports, while local industrialists lobby for high import tariffs to safeguard domestic production. Although one tobacco company pays more taxes than the entire salaried class in Pakistan, the latter still believes its income tax rate should be slashed because it contributes more to the national kitty than retailers and independent professionals, such as lawyers, doctors and consultants.

Thus, from ordinary citizens to industry pressure groups, each segment of taxpayers lobbies politicians for a change in the tax code every year, in order to make taxation more ‘equitable’. The result is a hotchpotch of taxes, tariffs, duties, exemptions and refunds, which is so complicated that very few people can actually understand it. According to a World Bank study, the total number of tax payments a Pakistan-based corporate entity makes every year is 47 as opposed to the average of less than 12 for its counterparts operating in a developed country. Similarly, it takes a Pakistani company 594 hours on average to prepare, file and pay taxes as opposed to the average of less than 176 hours for developed economies.

Tax collection will not improve unless all incentives and distortions created in the name of making the tax code ‘equitable’ are done away with. Letting politicians and the bureaucracy continuously tinker with the tax code complicates the system further instead of making it equitable. The words of the American economist, Thomas Sowell, are worth remembering here: “The most basic question is not what is best, but who will decide what is best.”

Published in The Express Tribune, May 30th, 2015. 

The post When ‘equity’ can be taxing appeared first on The Express Tribune.

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