Oliver Wendell Holmes Jr., an early 20th century US Supreme Court Justice, had famously said: “Taxes are what we pay for civilised society”. But James Madison, a US President, had articulated a profound argument 200 years ago: “The power of taxing people and their property is essential to the very existence of government.” But much before both of them ancient Greek philosopher Plato had made the following remarks: “Where there is an income tax, the just man will pay more and the unjust less on the same amount of income.” But the most profound quote in the realm of taxation one could come across is by Frederick the Great, 18th century Prussian king. According to him: “No government can exist without taxation. This money must be levied on the people; and the grand art consists of levying so as not to oppress.” It is interesting to note that many have disputed Justice Holmes Jr’s these remarks inscribed above the entrance to the headquarters of US’ Internal Revenue Service. According to them, at the time when Justice Holmes Jr made this statement, the average tax rate in the US was 3.5 percent. Today, the US system is accused of raising taxes, keep printing money because, according to critics of US taxation system, Washington has built an unsustainable system that depends on debt, over-consumption, and resorting to war in order to maintain itself. The above, therefore constitutes a sardonic comment on the present-day Pakistan.
Newspaper columnists and eminent economists, unlike politicians, do not have to win votes to get themselves elected. Social democracy had to emerge in Western Europe to successfully overcome the challenge of communism following the World War-I. It did denied communism or radical socialism a victory in Western Europe. Zulfiqar Ali Bhutto nationalised trade and industry and later his daughter and the then Prime Minister, Benazir, too decided to go for the sell-off of some of these units, albeit reluctantly, but her successor Nawaz Sharif had radically different approach to the country’s economy. He himself had witnessed the disastrous consequences of nationalisation and how profitable units were turned into employment exchanges, which are more than ever bleeding the national exchequer. His Finance Minister M. Ishaq Dar is now doing damage control – which to some critics is not the right way. They say borrowing is not the answer to the gaping fiscal wound and stretched public services. The rich alone do not generate enough resources that can be taxed to fill the fiscal gap and higher tax in overly taxed manufacturing sector will also not provide the much needed resources. So what is the answer? Go after those who are not in the tax pool.
But we also need to tighten our belts by simplifying our lifestyles and stop living beyond means. Increasing the burden of tax on a few feudals, super rich and some professionals alone will not suffice. The numbers do not match. This is precisely the reason why all governments resort to indirect taxes on all segments of society. Taxes are a menace which should not sting just a few but bulk of society. This is what the economy needs. When budgets presented (federal or provincial) carrying headlines that no new taxes levied at a time when the country is fighting terrorism at home indeed do not make sense.
Keeping the price of water, power, transport and energy low is indeed desirable but users need to pay the real cost and the government needs to avoid taxing them. But then, this is easier said than done. Why should lenders keep on lending to a nation where people do not pay taxes. They are justified in asking how come country’s law does not punish those who avoid paying taxes and courts still provide them protection? It is because our tax collectors misuse their powers and courts are the only protector of taxpayers who do pay obligingly and are also willing to pay the amount legally due. The tax system, therefore, needs to be overhauled and redesigned in accordance with laws and rules applicable to all and not just a few individuals or big corporates. Vertical and horizontal equity in taxation and buoyancy in taxation are principles that provide positive results. Regressive taxation does not. According to philosopher, teacher and economist in ancient India, Chanakya: “Taxes should be collected the way a honeybee collects the honey from flower”. Yes, the honeybee always takes care that only a little is taken without maiming or killing the flower.
The text appeared in the editorial of Business Recorder today.