Doing Taxes Better: Simplify, Open and Grow Economy
Taxes have been the cornerstone of IMF-led adjustment programs for Pakistan for over four decades. During this period, long term growth and productivity have declined while the tax policy has become more contentious and fragmented. Measures multiply as unrealistic targets are chased with mini budgets every quarter. The following arose from a high-level conference arranged by PIDE to outline future directions in tax policy. Illusive Targets: Chasing Tax GDP Ratio through Arbitrary Measures For decades now, the policy has given priority to increasing the tax-to-GDP ratio leaving growth and employment to an outcome perhaps of some projects funded by the Public Sector Development Programs (PSDP). Expenditures are never reviewed or rationalised for efficiency. Public sector employment is guaranteed, and annual wage increases are held sacrosanct while operational expenditures are regularly cut. Arbitrary and frequent tax changes have created an environment of uncertainty while cuts in operational expenditure have led to “austerity.” Increasing the tax-to-GDP ratio regardless of how this has become the cornerstone of policy. The narrative that the government and donors have established is that Pakistan has a tax- to-GDP ratio lower than some other countries. Box 2 shows the tax-to-GDP ratio for a select group of countries. It clearly shows that even in advanced countries, this ratio can vary by as much as 15 percentage points. Pakistan’s tax-to-GDP ratio of 14 percent is not very low as compared to other countries of the region: Sri Lanka (13 percent), India (18 percent), and Bangladesh (8.5 percent).