Middle class— tax trapped

The middle class is commonly seen as the fundamental support system of society, exerting a pivotal influence on economic progress. This is equally true in Pakistan. These individuals are not only the engine that drives economic growth through consumption and productivity, but they also contribute significantly to the country’s development through taxes and investment in education and skills.

Notwithstanding these circumstances, the middle class faces a pressing predicament. They are subject to significant taxation through direct and indirect means yet receive few compensatory benefits. Consequently, they become trapped in a recurring pattern of financial burden, rendering upward social mobility unattainable.

The middle class constitutes a crucial component of the economy. They constitute the most significant consumer segment, driving the demand for products and services that sustain industry operations and generate employment opportunities.

Their expenditure stimulates the economy, and a substantial number of middle-class taxpayers are also entrepreneurs or professionals who make valuable contributions through innovation and the establishment of new businesses.

Moreover, they contribute to political and social stability by endorsing democratic procedures and promoting moderation. However, despite their valuable contributions, they frequently experience a sense of neglect, particularly when confronted with a tax system that restricts their ability to save or invest.

Regarding taxation, the middle-class experiences most of the burden. Higher incomes are subject to higher taxes due to the system’s structure. Individuals with an income ranging from PKR 600,000 to PKR 1.2 million are subject to a tax rate of 5%, whereas those with an income beyond PKR 10 million are subject to a charge of 35% in addition to a surcharge of 10% on such tax. Though it may appear equitable on paper, this disproportionately affects the middle class. Despite producing enough income to fall into these higher tax brackets, the middle class struggles to manage the financial strain effectively.

In addition, indirect taxes, like the 18% General Sales Tax (GST) on goods and services, erode their available income. Each time they make food purchases, settle energy bills, or refuel their automobiles, they are subjected to further taxation.

This weight becomes even more unwarranted when one considers that numerous middle-class families were formerly members of the lowest level of society. They made substantial investments in education and professional development to enhance their circumstances. They made personal sacrifices to accumulate funds for private schooling, university tuition, and pursuit of higher education to ensure a more promising future.

Presently, after exerting much effort to advance in their careers, they are confronted with a tax system that deprives them of a substantial portion of their earnings, and they receive inadequate public services in exchange. The outcome? Individuals must bear the cost of public services through taxation and private alternatives via personal funds, as the state fails to provide for their needs.

Many individuals in the middle class may justifiably question the need to provide financial support to the lower class through their tax contributions. Considering their diligent efforts to achieve their current status, it is unjustifiable for them to shoulder the financial responsibility of others. However, the concept of wealth redistribution extends beyond mere philanthropy.

The objective is to construct a society where all individuals have equal access to fundamental services such as education, healthcare, and security. When the lower socioeconomic group is provided with these possibilities, they enhance their productivity as members of society, make valuable contributions to the economy, and decrease their long-term need for welfare programs. This confers advantages to all individuals, including the middle class.

However, the issue at hand extends beyond the mere provision of help for the lower socioeconomic strata. The middle class indirectly sustains the upper class with the current tax system.

Millions of affluent individuals and firms evade their equitable tax obligations by taking advantage of legal loopholes or remaining in informal sectors. What is the outcome? The majority of the tax burden is borne by the middle class.

The issue at hand extends beyond mere feeling overwhelmed; it involves recognising that the most affluent individuals receive public benefits without making equitable contributions. In addition to subsidising the wealthy, the middle class is left to bear the financial burden of supporting the disadvantaged.

The implications of this unjustified tax system are tangible. Many middle-class households experience a sense of being ensnared in a financial cycle that prevents them from saving or investing for the future.

Despite their diligent efforts, the escalating living expenses and exorbitant taxes impede their progress. Their primary challenge is accumulating wealth or affording their children the requisite possibilities to ascend the economic hierarchy. Social mobility, a goal for which they exerted much effort, seems exceedingly difficult to attain.

Taxpayers are a country’s most valuable asset. Neglecting them will lead to a decline in their ability to generate revenue. Neglecting them means the government will spend more to keep them afloat without achieving their full potential.

So, what measures can be taken to rectify this? Substantial modifications are required to alleviate the strain on the middle class and establish a more equitable system.

Firstly, the government should expand the tax base by ensuring that the most affluent individuals and major enterprises contribute equally. This objective can be accomplished by eliminating legal gaps and enhancing the implementation of tax regulations.

Furthermore, it is essential to decrease the government’s dependence on indirect taxes, which disproportionately impact the middle class. An equitable and well-proportioned tax system would alleviate the financial strain.

Equally important is the enhancement of public services. If middle-class households could rely on public healthcare, education, and infrastructure, they would not be required to personally bear the costs of private alternatives.

The government must allocate resources towards public schools, hospitals, and transit networks to ensure universal access to essential services. The provision of tax incentives for education and healthcare expenditures would alleviate financial strain and promote savings.

Further, there is a need for reforms of state-owned businesses (SOEs). Many organisations, such as the national airline and steel mills, are financially unprofitable and rely heavily on substantial government subsidies. Through the implementation of reforms or privatisation of these firms, the government has the potential to mitigate financial inefficiencies and allocate resources towards critical sectors such as healthcare and education.

To address this issue effectively, adopting a comprehensive strategy that alleviates the strain on the middle class and guarantees that the wealthiest individuals make their equitable contribution is necessary. It is possible to establish a more robust and resilient middle class by implementing a fairer tax system, enhancing public services, and restructuring ineffective government institutions. This concept extends beyond mere equity; it aims to establish a more resilient and affluent society where everyone has an equal opportunity to succeed. Given its role as the economy’s foundation, the middle class requires a system that appreciates its contributions and fosters continuous expansion. The genuine progress of the nation can only be achieved at that point.

Copyright Business Recorder, 2024