Making tax system functional

The primary function of a tax system is to raise revenue for the governments at various levels, in the case of Pakistan, federal and provincial, for their public expenditure as well as for local authorities and similar public bodies. Thus, the first goal in development strategy as regards taxation policy is to ensure that this function is discharged effectively. The performance of the Pakistani tax managers at federal and provincial levels on this account is highly disappointing as fiscal deficit has been increasing beyond reasonable limits during the last many years and the revenue targets fixed annually, revised downwards many a times, could not be achieved.
The second equally important function of tax is to reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends by various countries. In Pakistan, there has been a gradual shift from equitable taxes to highly inequitable taxes. The shift from removing inequalities through progressive taxes to easily collectable indirect taxes, withholding taxes constituting presumptive and minimum taxes under the income tax law, has destroyed the just and fair basis of entire system. Since the burden of indirect taxes that include presumptive and minimum taxes can be passed on the clients/consumers, effectively the burden of taxes was shifted from the rich to the poor.
Initial developmental efforts are generally marked by inflationary tendencies in an economy. Inflation, if uncontrolled, may thwart all development plans and bring misery to the poor. A reasonable degree of price stability should be the primary concern of a government's economic policies. The overall level of economic activity in an economy depends upon aggregate demand, relative to capacity output. At times, the level of aggregate demand may be insufficient to secure full employment of labour and other factors of production. At other times, aggregate demand may exceed available output at full employment level. Government intervention in both the cases becomes essential to correct such disequilibria in the economy.
The evaluation of our existing tax system with reference to the foregoing objectives is a difficult task because various other policies (like public expenditure policy) may be geared to achieve the same objectives. To what extent the redistributive objective has been served and the extent to which tax policy plays a relative role are difficult questions to answer. Moreover, the various objectives of tax policy may not always work harmoniously. Rather, they are often in conflict with each other if not mutually exclusive. Since the tax system of a country grows out of the interaction between political judgment and economic rationale, the process of compromises and trade-offs is influenced by political expediency and economic logic, the former, in most cases, having the upper hand. In fact, political requirements and economic thinking change with time, giving new directions to tax policy. As Richard Bird has observed, "Tax reform is, therefore, a never-ending process, not something that can be brought about once and for all and then forgotten."
It is a curious paradox of our situation that while money for worthwhile industrial and business growth and public benefits is scarce, there is colossal unaccounted cash supply circulating in the economy in search of further undercover gains. What is more tragic is that this social evil inherent in the tax system gets doubly compounded as it necessitates greater and greater tax burden on those who are law-abiding. The most crucial problem faced by us in fiscal reform programme is that of devising astute and stringent measures to curb tax evasion so that we can distribute the burden of taxes fairly and justly between different persons in the same or similar walks of life. Honest taxpayers have to be safeguarded as day by day they are being disillusioned by the fact that mighty tax evaders are not paying anything with the connivance of their friends and mentors in the tax machinery and then get generous immunities and amnesties. The unholy alliance between tax evaders/their advisers and corrupt tax officials has to be eliminated as a first and foremost step if we want to initiate any meaningful change in the tax system.
The privileged classes of society would act as an example for others. The State needs to wage an all-out war against burgeoning black economy, money power and corrupt politico-administrative structures. This war must start from the mighty classes. The people of Pakistan have a right to know how these mighty sections of society amassed immense wealth without paying their due taxes.
(The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences)