Pakistan to tax the wealthy: If the rich pull their weight in taxes, it might help everyone

Pakistan taxes the super-rich to alleviate burden on poor, help collect revenue and stop the country from slipping into bankruptcy. What Pakistan has been forced to do under an extraordinary circumstance is, what many economists believe, an idea whose time has come.
The Pakistani elite will be shelling out more in taxes as the Shehbaz Sharif government takes tough measures to revive the sinking economy. What Pakistan was forced to do under extraordinary times is an old idea that has been gaining favour among some economists who say if there was ever a right time to tax the wealthy, it is now.
High net worth individuals will be subject to a “poverty alleviation tax”. Those whose annual income exceeds Rs150 million will be subject to 1 per cent tax; for Rs200 million the tax rate is 2 per cent; for Rs250 million, 3 per cent; and those who earn more than Rs300 million will be taxed 4 per cent of their income, Dawn reported.
In addition, Islamabad imposed a 10 per cent “super tax” on large-scale industries. These include cement, steel, sugar, oil and gas, fertilisers, LNG terminals, textile, banking, automobile, cigarettes, beverages, chemicals, and airlines.
The country’s Finance Minister Miftah Ismail said the “super tax” is a “one-time tax” needed to curtail the previous four record budget deficits.
Pakistan’s tax collection system has been riddled with corruption and evasion. To collect more funds to finance the country’s public spending projects, the Sharif government has exhorted the rich to pull their weight in taxes at a time when the poor are already burdened with soaring prices amid high inflation due to shortages and a tanking Pakistani Rupee.
Ismail said in a press conference: “In Pakistan, it is the poor who have always suffered the burden of taxes, but the Shehbaz-government has decided to impose it on the incomes of the rich. This time, we will ensure that the sacrifice is shared. You have always seen that previous governments imposed taxes on consumption, which had a disproportionate impact on the poor. But we have not increased any indirect taxes or that on consumption in the budget this time around.”
Why don’t governments tax the rich?
The notion that it is good to tax the rich as much as possible has existed for years but it is a rather unpopular idea for obvious reasons. So, most governments do not introduce wealth taxes. Pakistan was compelled to do so under extraordinary circumstances.
Even then, there has been an increasing clamour in Pakistan in recent times to redistribute wealth in a nation that had one of the lowest tax-to-GDP ratios (which shows how low the country’s tax revenue is compared to the size of its economy).
Pakistan has relied heavily on borrowing to keep itself running. The country had low flows of Foreign Direct Investment and dwindling exports as well as faltering tax revenue for years, leading to over-dependence on foreign loans as a result of which the country now finds itself in debt.
Traditionally ordinary, low and middle-income Pakistanis have paid a disproportionate amount in taxes (usually indirect) while the rich got away. A Dawn editorial published in November 2021 says, “By avoiding tax payments and securing exemptions, the rich have for long forced successive governments to run large deficits, cut expenditure on social and economic infrastructure and increase the tax burden on the rest of the country.”
Incidentally, former PM Imran Khan, who continued the policy of looking the other way while the rich enjoyed a tax amnesty in Pakistan, had said he would tax the rich to help the poor just before his government was ousted in a trust vote in April this year.
Why wealth tax may be a good idea
As the Covid-19 pandemic and the war in Ukraine have widened inequality, many economists are once again arguing in favour of a wealth tax.
Jim Brumby, a senior adviser with the World Bank wrote last year that a post-pandemic world is the right one in which to consider a wealth tax. He wrote: “This can help close the inequality gap, plug the fiscal hole and win back trust. According to forthcoming work at the World Bank, taxpayer compliance is bolstered by rebuilding trust; and an important element of that trust comes from the sense that taxes are fair.”
In a recent study published by the Potsdam Institute for Climate Impact Research (PIK) economists argued that capital taxation may serve to close inequality and boost the prosperity of a nation, especially one where labour was readily available.
Lead author Linus Mattauch said that two fears stand in the way of rolling out such a tax reform and those are: that capital investment in machines would reduce, subduing productivity and overall prosperity, and the rich would pass on the tax burden by lowering wages of the poor.
However, Mattauch and his team, which included US Nobel Laureate Joseph Stiglitz, say that their research actually shows that taxing income from capital aids social welfare if the revenue is invested in providing public infrastructure or health and education.
The economists suggested that the model can work because the super-rich save for posterity and not their own retirement.
“It is the saving behaviour of the rich that really drives wealth disparities,” Mattauch argued, stressing that “governments must not be afraid to impose higher capital taxation on the very rich.”
However, the economists cautioned that the taxation should be realistic because too-high taxes would choke investment in capital. They said that if capital investment falls, so would productivity and prosperity. In countries where labour can replace or supplement machines, the risk of reduced productivity was lower.
The researchers say that while the current inequality is because the rich are getting richer, the poor are not getting poorer, and fairer taxes might forge better social cohesion at a time the world was witnessing multiple crises and the need for people to stand together and to stand up for each other was more critical than ever.
End of Article