The Laffer Curve and Pakistan

In the last couple of days, the newspapers in Pakistan are abuzz with another mini budget to be announced by the government of Pakistan. It seems that the Tax Revenue once again is going to have a significant shortfall from the budgetary figures. Combined with heavy taxes on petroleum products, falling exports and falling LSM production, the Government has decided to increase further the Tax Rates in order to raise the Tax Revenue. The question is whether increasing the Tax Rate will increase the Tax Revenue or we have reached a point of Diminishing Returns.
To understand it, we need to study the Laffer Curve concept as it applies to Pakistan Arthur Betz Laffer (born August 14, 1940) is an American economist who first gained prominence during the Reagan administration as a member of Reagan's Economic Policy Advisory Board. He is best known for his economic concept, popularly known as the Laffer Curve. Before understanding the Laffer Curve, we need to go back about 1400 years to the period of our 4th Caliph, Hazrat Ali (RA).
The following excerpts from a letter written to Maalik al-Ashtar by Hazrat Ali (RA) who appointed him as the Governor of Egypt, describes the revenue administration as advised by Him: Great care is to be exercised in revenue administration, to ensure the prosperity of those who pay the revenue to the state, for on their prosperity depend the prosperity of others, particularly of the masses. Indeed, the state exists on its revenue. You should regard the proper upkeep of the land in cultivation as of greater importance than the collection of revenue, for revenue cannot be derived except by making the land productive. He who demands revenue without helping the cultivator to improve his land, inflicts unmerited hardship on the cultivator and ruins the state. The rule of such a person does not last long. If the cultivators ask for a reduction in their land tax for having suffered from epidemics, drought, excessive rainfall, soil infertility, floods impairing the fertility of the land or the cause of crop damage, then reduce the tax accordingly, so that their condition may improve. Do not mind the loss of revenue on that account, for that will return to you one day manifold in the hour of greater prosperity of the land and enable you to improve the condition of your towns and to raise the prestige of your state.
Further in the same letter Hazrat Ali (RA) advises as follows: Remember, Maalik! If a country is prosperous and if its people are well-to-do then it will happily and willingly bear any burden.
The poverty of the people is the actual cause of the devastation and ruination of a country and the main cause of the poverty of the people is the desire of its ruler and officers to amass wealth and possessions whether by fair or foul means. They are afraid of losing their posts or positions and sway or rule and want to make the most during the shortest time at their disposal. They never learn any lesson from the history of nations and never pay any attention to the commands of Allah.
-- Ali ibn Abi Talib, Nahj al-Balagha, Letter About 600 years later, Ibn Khaldun, a 14th century Tunisian born sociologist/historian described the sociological implications of tax choice (which now forms a part of economics theory):
In the early stages of the state, taxes are light in their incidence, but fetch in large revenue...as time passes and kings succeed each other, they lose their tribal habits in favour of more civilised ones. Their needs and exigencies grow...owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects...and sharply raise the rate of old taxes to increase their yield... But the effects on business of this rise in taxation make themselves felt. For businessmen are soon discouraged by the comparison of their profits with the burden of their taxes... Consequently, production falls off, and with it the yield of taxation.
This analysis is very similar to the modern economic concept known as the Laffer Curve. Arthur Laffer does not claim to have invented the concept himself, noting that the idea was present in the work of Ibn Khaldun and, more recently, John Maynard Keynes.
The Laffer Curve claims to illustrate the concept of taxable income elasticity, ie, taxable income will change in response to changes in the rate of taxation. It postulates that no revenue will be raised at the extreme tax rate. The Laffer Curve is typically illustrated as a graph which starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate. Simply put, it implicates that increasing tax rates beyond a certain point will be counter-productive for raising further tax revenue and more importantly that decreasing the tax rate might actually increase the tax revenue.
Using this concept in the US, the Democratic Party made a similar argument in the 1880s when high revenue from import tariffs raised during the Civil War (1861-1865) led to federal budget surpluses. Democratic Party, then rooted in the agricultural south, argued tariff reductions would increase revenues further by increasing the number of taxable imports.
Between 1979 and 2002, more than 40 other countries, including the United Kingdom, Belgium, Denmark, Finland, France, Germany, Norway and Sweden cut their top rates of personal income tax. In an article about this, Alan Reynolds, a senior fellow with the right-libertarian think tank Cato Institute, wrote, "Why did so many other countries so dramatically reduce marginal tax rates? Perhaps they were influenced by new economic analysis and evidence from... supply-side economics. But the sheer force of example may well have been more persuasive. Political authorities saw that other national governments fared better by having tax collectors claim a medium share of a rapidly growing economy (a low marginal tax) rather than trying to extract a large share of a stagnant economy (a high average tax)."
On the contrary, the Japanese government raised the sales tax in 1997 for the purpose of balancing its budget, but the government revenue decreased by 4.5 trillion yen because consumption stumbled. The country recorded a GDP growth rate of 3 percent in 1996, but after the tax hike the economy sank into recession. The tax revenue reached a peak of 53 trillion yen in FY1997, and declined in subsequent years, being 42 trillion yen (537 billion US dollars) in 2012.
Reviewing the foregoing argument, it should be analyzed by the Finance Ministry of GoP and by the economic experts, and maybe come to the conclusion that further increase in the tax rate may not increase the tax revenue.