On the basis of tax distribution

That Pakistan should give lesser importance to population when it comes to the basis of distribution of taxes among the four provinces has been frequently demanded by several independent economists. The moot on fiscal federalism and intergovernmental revenue transfers, organised by Islamabad-based think tank Prime Institute in Karachi this week, also brought those ideas back into the spotlight.

Dr Sajid Amin, Head of Policy Unit at another Islamabad-based think tank the SDPI, who is writing a paper for Prime Institute, said Pakistan needs to gradually move away from need-based indicators such as population to efficiency-based indicators such those linked to poverty, fiscal effort, or governance outcomes for the purpose of horizontal distribution of taxes. But whether or not the provincial governments are ready for this transition, and if so then to what degree – that is the question Dr Amin is out to explore in his consultations across the country.

Normatively speaking, the gradual reduction of the weight of population as the basis of distribution of taxes among the provinces is a good proposal. But one that needs to be seen with caution.

Efficiency-based indicators as the basis of horizontal fiscal transfers are more effective when public representation, transparency, citizen awareness, and bottom-up democratic disposition already exist in the society, while the sub-national governments enjoy effective autonomy. Its success also rests on the assumption that institutions of citizen accountability also exist at sub-national levels – either via media or via public institutions such as auditor general, NAB, lawmakers’ oversight committee etc in the case of Pakistan.

The transition toward efficiency-based indicators also requires a host of reliable data sets and knowledge gaps to be filled. The check includes but is not limited to the measurement of the cost of basic public service delivery, a shared view of minimum quality of public goods; the measurement of the fiscal capacity of sub-national governments; effective institutions and laws to ensure transparency, and accountability; periodic evaluation and monitoring reports; measurement of indicators of governance capacity.

In absence of these factors and datasets, will the transition to efficiency-seeking basis of distribution from need-based distribution be successful? Which one is the horse, and which is the cart? That’s a subject that might become a part of ensuing debates on fiscal federalism in Pakistan.