WASHINGTON DIARY: Pay your dues
by: Dr Manzur Ejaz, USA
Courtesy: Wichaar.com, September 1st, 2009
Some critics argue that paying taxes in Pakistan is counterproductive because it further enriches the corrupt ruling classes. One can argue that accountability for tax revenues is a very low political priority because the most vocal and powerful sections of society do not pay their fair share.
Had my parents not invested heavily in my education, I would be languishing in the dusty old village where I was born. Or had I not invested most of my income in my children’s education, I might be looking for them in places like ghettos or jails. Societies are no different: when they invest the better part of their income on citizens’ well being, they are better off than otherwise. This is apparent from a world tax-to-GDP ratio table.
Tax-to-GDP ratio indicates what percentage of the Gross Domestic Product is collected by the state. The worldwide table, computed by the Washington-based Heritage Foundation, shows that countries that collect a very high percentage of GDP in taxes have the best living standards, while states at the bottom of the table are impoverished and near total collapse.
Denmark and Sweden, with 49.1 and 48.9 respectively, have the highest tax-to-GDP ratio. Most West European nations collect over 40 percent of GDP in tax. Even East European struggling nations’ ratio is above 30 percent. The United States, not very friendly towards its poor population, collects 28 percent of GDP, while its neighbour Canada takes 33 percent in taxes.
Pakistan, with a 10.6 percent ratio is in the league of the notoriously failing and downtrodden countries, in the company of Afghanistan (6.4 percent), Burma (4.9 percent), Nigeria (6.1 percent), Sudan (6.3 percent) and a handful of African or Latin American nations. Even India has a much higher rate of 17.7 percent. The only exceptions are the oil-rich countries of the Middle East, which have a ratio of around 2 because they do not depend on taxes for state revenues.
Tax-to-GDP ratio is a simple measure of dividing total taxes by national income. It does not take into account the way tax revenues are collected or spent. Countries with higher military spending like the US and Pakistan may be using most of their tax revenues on non-public uses. Denmark’s high tax revenues are mostly spent on non-defence public service while Pakistan’s very low tax revenues are plugged into the military establishment. Therefore, Pakistan’s tax-to-GDP ratio after military spending may be around three to four percent.
Another major caveat is the method of taxation. Poor and common citizens are the major source of revenue if most taxes are collected indirectly. On the contrary, if, like European countries, taxes are levied on personal and business income, common citizens are not burdened. In Pakistan, most tax revenues are drawn indirectly from common folks. Therefore, people are in double jeopardy: they pay taxes while they are incapable of doing so and, on top of that, most of the revenues are not spent on them as is the case in high tax-to-GDP ratio countries.
Evolution of civic sensibility, maturity of ruling classes and corruption are the key elements that differentiate the high and low tax-to-GDP ratio countries. Those with a high ratio are mostly industrialised with mature democratic political institutions; further, the level of corruption is negligible.
Citizens in developed industrialised countries pay taxes because they are cognisant of the fact that their well being is directly derived from the collective institutions. They understand that if they need better roads, transportation, health and education, they have to pay. Furthermore, certain needs and services are considered essential components of basic human rights. Therefore, whether or not a certain portion of the population can afford such services, society has a responsibility to provide them. Tax-paying citizens recognise this and willingly pay for it. In this way, paying taxes is considered a civic duty. Of course, tax evasion is everywhere, but ethos in high tax-to-GDP countries is based on this recognition.
On the other hand, the countries with low tax-to-GDP ratio are stuck with feudalism or tribalism, and are being governed by corrupt traditional elites. The governing elites of these countries do not recognise the human rights of the people. They improvise feudalistic methods of extracting the most from the people while giving back very little or nothing at all. The new emerging rich classes are co-opted to perpetuate the old corrupt and oppressive system. Pakistan is a classic example of such countries, where traditional rulers have co-opted the new elites, are continuing with renovated methods of extraction through indirect taxes and corruption, and are usurping resources through state power.
Some critics argue that paying taxes in Pakistan is counterproductive because it further enriches the corrupt ruling classes. One can argue that accountability for tax revenues is a very low political priority because the most vocal and powerful sections of society do not pay their fair share, and the ones who pay through indirect means, i.e. the common people, have no voice. If the wealthy and the businesses start paying their full share, they will force accountability as well.
Pakistan’s low tax-to-GDP ratio indicates that the country is still very far from joining the civilised world, in which certain essential human needs are recognised as basic and everyone pays their share to improve society.
The writer can be reached at firstname.lastname@example.org