The way out of inequality

Earlier this year, Oxfam shook the world by disclosing that the world's 62 richest persons now own the same wealth on which survive the poorest 3.6 million. The report concluded: far from trickling down, income and wealth are instead, being sucked upwards at an alarming rate.
So inequality is spreading globally, between the developed and developing countries as well as within these two sets of countries. This expanding inequality within moderate to poor countries is increasingly denying millions access to even two square meals a day while their own richest elite making up far less than one percent of the population live a lifestyle that would shame even the millionaires of rich countries.
Pakistani poor are no exception. They are wallowing in abject poverty while their rich and famous go abroad for medical treatment, send their children to the most expensive colleges in the US and Europe and let their extended family set up lucrative businesses in foreign lands with laundered money they had siphoned off from Pakistan through commissions, kickbacks, under the table bribes and through under-invoicing and over-invoicing in foreign trade.
In a social democracy, the most important objective of taxation is to provide economic justice, which relates to distribution of tax burden equitably and equitable dispersal of benefits of public expenditure while maintaining vertical and horizontal equity. Taxation of the rich for the benefit of the poor is at the core of social democracy. It encompasses, besides equitable redistribution of wealth such questions as treatment of weaker sections of society as well eg, women and children, minorities, the disabled and unemployed. All these elements are missing in our polity and tax policy.
Unfortunately in Pakistan, successive rulers, both military and civilian, used taxes as a tool to extort from the masses as much as possible for their own comforts and luxuries. By resorting to repressive tax laws, they make the rich, richer and the poor, poorer. Our official financial managers are caught up in a dilemma. On the one hand, there is a mounting pressure to reduce fiscal deficit through improved collections and on the other, they are not ready to abolish innumerable tax exemptions and concessions available to the rich and mighty.
Our politicians lack willingness or the vision to achieve a sensible balance between income, capital and consumption taxes. The country actually needs more investments in creating human capital (eg, education, vocational training and health), and necessary public infrastructure to increase productivity of the economy.
Independent observers have provided tax data and surveys showing how the rich and mighty are thriving on a defective tax system. Figure fudging by the FBR whose collection comprises 70 percent regressive taxes has become something like an accepted habit. Excessive and regressive taxation prevent individuals and businesses from taking full advantage of opportunities that are being thrown open by new knowledge-based economies. Taxpayers should ideally share the burden of protecting those who are less privileged in society through well-designed social protection but not through excessively rigid job protection measures and inflexible labour regimes that penalise productivity. That is why a fair, equitable and transparent tax system is so essential for maximising economic growth.
In Pakistan, the poor are subjected to heavy and harsh taxation to finance luxuries of the elite, enjoying free perquisites, benefits, including purchase of valuable state-owned plots in prime locations at throwaway prices. The way those who are supposed to collect and spend waste and plunder taxpayers' money is no secret. The country has been surviving on bailouts from the IMF due to perpetual failure of the ruling elite to tax the rich and the mighty that matter in the country. Revenues worth trillions of rupees have been sacrificed by governments - civil and military alike - since 1977, extending unprecedented exemptions and concessions to the privileged classes. The federal and the provincial governments have shown little interest in collecting progressive taxes, eg, Estate Duty, Gift Tax, Capital Gains Tax and so on.
During General Zia's rule of 11 years and that of General Musharraf of nearly nine years, absentee landowners (including those who received state lands as awards or otherwise!) did not pay a single penny as agricultural income tax or wealth tax. Taxation of 'agricultural income', at present, is the sole prerogative of provincial governments under the 1973 Constitution. All four provinces have laws to this effect, but total collection has not exceeded more than Rs 2 billion (share of agriculture in GDP was about 22 percent) for any year since. No one has calculated how much tax loss Pakistan has suffered perpetually since 1977 on account of non-taxation of agricultural income alone as suggested under the Finance Act, 1977. According to the yet to be implemented Taxation Reforms Commission (TRC) report, the total loss of revenue through various exemptions, non-taxation of benefits given to the state oligarchy and through Statutory Regulatory Orders issued during the last four decades, amounts to more than Rs 100 trillion - this explains how unprecedented concessions to the rich have made the state poorer, rendering the country to enormous indebtedness. We would not have required any borrowing at all, if tax losses of such magnitude had not occurred at least since 1977.
With emphasis on pure growth, without any concern for equity but not even achieving the growth rate, which in normal circumstances would have entailed at least of 10-12 percent, every year for at least a decade without any pause or reversal for the trickle-down effect to become meaningful to a degree, thanks to the IMF's insistence on macroeconomic stability, developing countries like Pakistan continue to suffer from expanding inequality in troubled silence.
One way of tackling the problem is to spend your way out of the crisis by borrowing and printing currency and spending the amount on creating productive jobs that would put spending cash in the hands of the poor, leading to increase in demand that would stimulate supplies and that in turn would result in higher growth rates.
The other way is the De Soto way. The world famous Peruvian economist has his own theory about how to bridge the gap between the rich and the poor. The main message of his work is that no nation can have a strong market economy without adequate participation in an information framework that records ownership of property and other economic information. Unreported and unrecorded economic activity, according to him, results in many small entrepreneurs who lack legal ownership of their property finding it difficult to obtain credit, sell or expand business. He says they cannot seek legal remedies to business conflicts in court, since they do not have legal ownership. Lack of information on income prevents governments from collecting taxes and acting for the public welfare.
"The existence of such massive exclusion generates two parallel economies, legal and extra- legal. An elite minority enjoys the economic benefits of the law and globalisation, while the majority of entrepreneurs are stuck in poverty, where their assets - adding up to more than $10 trillion world-wide - languish as dead capital in the shadows of the law. To survive, to protect their assets, and to do as much business as possible, the extra-legals create their own rules. But as these local arrangements are full of shortcomings and are not easily enforceable, the extra-legals also create their own social, political and economic problems that affect the society at large."
The Peruvian economist believes that the real enemy is within the flawed legal systems of developing nations that make it virtually impossible for the majority of their people - and their assets - to gain a stake in the market. He says that what the poor majority in the developing world do not have is easy access to the legal system which, in the advanced nations of the world and for the elite in their countries, is the gateway to economic success, for it is in the legal system where property documents are created and standardised according to law. Documentation permits society to engage in such crucial economic activities as identifying and gaining access to information about individuals, their assets, their titles, rights, charges and obligations; establishing the limits of liability for businesses; knowing an asset's previous economic situation; assuring protection of third parties; and quantifying and valuing assets and rights. This in turn facilitate such opportunities as access to credit, the establishment of systems of identification, the creation of systems for credit and insurance information, the provision for housing and infrastructure, the issue of shares, the mortgage of property and a host of other economic activities that drive a modern market economy.