The salaried class in Pakistan has long borne the brunt of iniquitous taxation. Although not large in terms of sheer numbers per se, their tax effort is far larger than that of many sectors that are either uncovered or under-covered by the ramshackle tax architecture. After the Finance Act 2023 was passed, the burden of additional taxation to address the fiscal deficit has been laid nearly-squarely on their shoulders. Why? Because they are easy prey for the state, falling within the web of the formal economy, at the same time that so many people and entities who are at times making far larger returns roam outside this web, and are therefore not being compelled to shoulder their due weight. Frustrated with this injustice, and already squeezed by gut-wrenching inflation, the salaried class has decided to take a stand, in the guise of the Save the Salaried Class (SSC) movement.
The salaried class is right to protest the disproportionate burden that has been imposed upon them. By contrast, there are several major sectors of the economy that are not within the tax system but are considerable sources of revenue, such as agricultural, retail markets, and real estate. Why not address these? It boils down to a lack of moral and political courage. Vested interests from both sectors wish to maintain surpluses even as the state’s finances hollow out and it is forced to borrow from the domestic and international financial markets. This situation cannot continue indefinitely, and the growing debt burden of the country, already difficult to sustain, is worsening by the day. Yet the salaried class has not previously enjoyed either a privileged or vested position in the political machinations that translate into fiscal policy. By building a movement such as SSC, they are finally drawing attention to the plight that they must endure while other sectors enjoy supernormal profits outside the state’s purview.
The injustice is further heightened when one examines the size of federal and provincial governments, and the sorts of privileges and perks that are being enjoyed by politicians and public managers at a time when austerity should be their key driver. Much of this begins with the mindset steeped in the vestiges of post-colonial thinking, but with bloated appetites of the 21st century superimposed upon it. The fiscal deficit is not just a function of revenue, but also one of expenditures, and the equation should be seen as one of public value, as I have long argued. If public managers (in the broadest sense of the term) are creating sufficient public value, then their operational resources should be increased, even in the present circumstances. But in how many areas are public managers, federally or provincially, creating sufficient public value relative to their operational resources?
As a detailed CASS working paper on taxation from a few years ago has laid out, the principles of a good taxation system are all left unmet in Pakistan. A good tax system is fair, neutral, efficient, flexible, effective, simple, and stable. In all of these categories there are a host of shortcomings that must be addressed systematically. Instead, while succumbing to the IMF’s pressure, the government has found that draining the salaried class’ blood is a useful stopgap measure in order to secure a meager $3 billion in stand-by financing. The salaried class should not be so singularly disemboweled for the pretense of attaining lofty revenue targets. If the principles of proper taxation were followed in Pakistan, which is a matter of political will more than anything else, then there is more than enough revenue generated by the economic activity of 240 million people to achieve significant revenue targets.
The short-term mindset displayed in the Finance Act 2023 illustrates where the focus is, on tax depth rather than tax breadth, by applying straws to break the salaried class’ back. Instead, the wisest approach would be to increase tax breadth, incorporating large untaxed portions of the economy such as real estate, retailers, and agriculture to ease the burden of the hardworking public and to tighten speculation and rent-seeking in these major sectors. By articulating a common voice, perhaps the SSC can indicate that enough is enough, and more serious reforms need to be undertaken going ahead.
Dr. Usman W. Chohan is Advisor (Economic Affairs and National Development) at the Centre for Aerospace & Security Studies, Islamabad, Pakistan. He can be reached at [email protected].
