Taxing work and subsidising non-work

Turns out that there’s a Salaried Class Alliance (SCA), based in Karachi, which describes itself as a “non-political, non-religious, non-ethnic, non-profit organisation that aims to create awareness among the salaried class about their rights and responsibilities as taxpayers; to lobby with the government and other stakeholders for fair taxation policies; to provide legal and financial assistance to the salaried class in tax matters; and to promote the welfare and wellbeing of the salaried class in Pakistan”.

Good luck to them because if tax data from the last fiscal is anything to go by, this year’s increased target might not leave a salaried class to protect or lobby for; “killing the goose that lays the golden egg”, as the Alliance describes it.

I learned about SCA’s existence in a telling piece in the Express Tribune, claiming that the salaried class paid Rs264.3 billion in income tax in FY2022-23, “nearly 200 percent more than the combined taxes paid by the country’s exporters and highly undertaxed retailers”.

This amount was paid at a rate of up to 35 percent, which was already 40 percent higher than the previous fiscal year. That enabled the government to squeeze more out of the people that did not have the political clout to dodge income tax and boast higher collection in the year, even as “around 5,000 retailers were let off the hook by relaxing their registration conditions”. SCA breaks it down more brutally in an introductory article on LinkedIn:

According to the latest data from the Federal Bureau of Statistics (FBR), the salaried class contributed 42 percent of the total income tax collection in 2022-23, while accounting for only 15 percent of total registered taxpayers.

On the other hand, the agriculture sector, which contributes 20 percent of the GDP, paid less than 1 percent of the total income tax. Similarly, the real estate sector, which has unpaid potential of Rs 500 billion, and the wholesale and retail businesses, which have an unpaid potential of Rs 234 billion, are largely untaxed or under-taxed.

There’s more. To get close to its revenue target and meet IMF’s “upfront conditions”, the government also withdrew income tax relief of Rs 47 billion that was granted to the salaried class in 2021-22. And, on top of the new income tax slab of 35 percent on annual income of Rs 6 million or more, it also increased the sales tax from 16 percent to 17 percent, cutting more into the purchasing power of middle- and lower-income groups just when they faced historic inflation and unemployment rates.

CPI inflation clocked in at 38 percent this May, which was seven times higher than core inflation, which leaves out volatile food and energy prices, of 18.5 percent. Food inflation, which makes for about 35 percent of CPI, was almost 49 percent.

Surely, this is absurd. You don’t have to be a hardened politician who’s skipped six parties in seven years to understand that this taxation policy is as unsustainable as it is ridiculous and discriminatory.

The Tribune piece further revealed that exporters paid only 1 percent of their gross receipts in income tax. And that retailers and wholesalers made for about 19 percent of the total economy, yet their share in total income tax was only 0.4 percent.

Then, when everybody was wondering who’d be put on the chopping block again to meet strict conditions of IMF’s Stand-By Arrangement (SBA), the finance minister – PML-N’s candidate for interim prime minister as well – cleared all doubts by stressing that there were no new taxes for agriculture and real estate in the program because “we have endured enough pain in meeting the IMF’s conditions”.

That leaves the salaried classes to be fed to the taxman, as usual, and gives you an idea about the impossibility of SCA’s task. How do you lobby for them when the finance minister, maybe even prime minister for a few months, leverages their suffering to lobby instead for his own constituency, the big fish who earn the most and pay the least in taxes because they support and bankroll campaigns for big politicians?

Let’s not forget that it’s not some sort of financial modeling or mathematical wizardry that conveniently pushes the economy’s biggest earners out of the tax net; even when their due contribution is essential to avoid the road to default itself.

It’s just the fact that they are the richest, and therefore most influential, people in this Islamic republic. And it is our particular brand of democracy that allows them to cheat taxes and still stay on the right side of the law, eating off the fat of the land even as the country sits on a debt bomb that is about to explode with devastating consequences; largely because no government could come up with something resembling a sane tax policy in seven and a half decades.

Reminds you of one of Milton Friedman’s most enduring quotes, “We have a system that increasingly taxes work and subsidises non-work”.

Copyright Business Recorder, 2023