The progress of a country’s revenue generation directly depends on the growth of its economy and the fairness of its tax collectors. At the broadest and lowest level of this enforcement lie a mass of people with different ideas, idiosyncrasies, historical traditions and daily experiences. This diversity is intertwined at the very top with governance manifested by its politicians, establishment, enforcement and intellectuals. If the two intertwine, it becomes endogenous growth.
The tax culture of a country will always take the colour of its top tier. It is never a one way traffic and good governance strives to make it interdependent. People will only cede to this contract if it is complementary.
No matter how much a country produces, if the proceeds are not translated into tangible taxes, it means there is something drastically wrong and inherently contradictory in the system. Like water, the system finds its own course and cannot be harnessed. It is like a neglected rebel child who finds his own ways to react.
At the national level this deprivation disconnects people; forcing them to diversify into parallel and unregulated economies. Their quest for subsistence does not rely on what the state does for them (which in any case is too little) but to find comfort at the lowest rung through a parallel system that provides sustenance, jobs, social security and living. Such societies ultimately become slaves to corrupt mafias, corrupt politicians and elites.
The best reflection of economic capacity is the endogenous Gross Domestic Product (GDP) in every sinew of the economic trail. Hence if the mechanism of revenue records and collection is faulty and bypassed, the entire economic management cycle is suspicious, non performing and inefficient. It will never tell the truth.
In the past five decades this admission of failure is visible in successively failed economic and taxation reforms. The system is divorced from the people and evolved at a tangent and exclusive to the rich and government departments. Consequently, something that ought to have been endogenous has been overtaken by exogenous factors. Every new martial law administrator, a chief executive and a prime minister began with the right intents only to be bogged down by the system and economic hitmen. All in the past have been failures.
A baby grows in the womb and not outside. A country evolves from within and not through outside factors. Laying traps to catch the big fish, amnesty schemes built around corruption of elites and imposition of regressive tax regimes is an admission of failure. It is not a solution.
The fish may rot from the head but all toxins collect in the gut. Pakistan is a case of rotting from the head and producing toxins from within. If the trend continues and reforms are not implemented through all-encompassing policies, Pakistan could be heading the way of many Latin American countries.
But, Pakistan has a very healthy and proud tradition of philanthropy and charity. The people are not averse to the concept of giving and donating as long as they know it goes to the right hands. Pakistan’s rich culture and societal values enriched by historical heritage are the biggest barriers to meltdown. This supercharger in Pakistan’s politic body needs to be harnessed.
This disconnect widens in societies where governments fail to invest in human resource development. This affects ratios like tax, education, health and living to GDP. In Pakistan’s economic indices, these anomalies float on the surface like evidence in a court but is constantly over looked. Successive governments in past five decades have failed to recognize and address this disconnect due to isolationary and exclusive policies deliberately avoiding to take bull by the horns.
The accountability and corruption investigations and amnesty schemes in Pakistan reflect the apathy and non-professionalism in the country’s economic management system. Unless the system does not undergo a paradigm reform, it will remain garbage in garbage out.
At the top of the system is the Economic Affairs Division with ministries of finance, commerce, agriculture, industries, education, health, technical education and planning commission. All these have to combine to formulate policies that focus on Endogenous Growth. It follows that investments in human capital, innovation, and knowledge are significant contributors to sustainable economic growth. Unless this is not done, sustainable development will remain a wishful notion.
The top tier is supported by a host of autonomous and semi-autonomous organisations that act as collectors, regulators, transparency watch dogs and law enforcers. These are the Central Bank (SBP), Federal Board of Revenue (FBR), Security and Exchange Commission of Pakistan (SECP), Competition Commission, Board of Investment, Export Promotion Bureau, Higher Education Commission (HEC), Federal Investigation Agency (FIA) and intelligence agencies.
The same concept trickles down to provinces, federally administered territories right down to the local self-governments. In a country where political elites dislike local self-government the growth is retarded directly in proportion to corruption.
Annually, all this translates into the Economic Survey prepared around statistics that are susceptible to fudging. The end result is the annual budget setting economic targets and allocating financial resources. The buck is ultimately passed to the revenue collectors.
These taxes are described in from articles 43 to 54 in the Constitution of Pakistan. In addition Article 260 also defines Excess Profit Tax as a Business Revenue Profit that industries and businesses tend to make by extraordinary methods. In the past four decades, Pakistan has undergone a sharp decline in progressive taxes and an unprecedented rise in Regressive Taxes. Some of the Acts of Law pertaining to Progressive Taxes have been abolished, though the Constitution still empowers the government to use these methods to boost Progressive or Direct Taxes.
Any country’s economic generation units are interconnected with the tax collectors to produce national wealth. Hence a country’s tax to GDP ratio is a first reflection of the tax collection mechanism. Further the physiology of taxation bodies is determined by the ratio of Direct and Indirect Taxes. Direct Taxes are based on income while Indirect or Regressive Taxes are based on Consumption. In developed economies, consumptive taxes could equal or outweigh direct taxes, but in countries besieged by economic mismanagement and poverty, such taxes pass the burden to the lowest rung of consumers. Hence they lead to more poverty, inflation and cost escalations.
Pakistan needs an interactive and not coercive tax mechanism. As indicated by Prime Minster, structural reforms preceded by imaginative policies may be the only sustainable revenue vehicle. But this is where the buck ends.
A new system cannot be built by individuals who have hands soiled in the past or those who trust IMF recipes more than scratching their heads and coming up with innovation. It would be a tragedy if Imran Khan’s straight forward vision cannot be translated into viable structural organisation.
Failure if any will be déjà vu.