It's not just a cliché: the poor are getting poorer in Pakistan

By Farooq Tirmizi

Most of Pakistan finds the budget speech delivered by Finance Minister Ishaq Dar on Tuesday to be indecipherable gobbledygook. But in this – the first budget that the PML-N government can take full responsibility for – the Nawaz Administration revealed the true nature of their thoughts and beliefs.

Buried in the dense legal text and more than 3,000 pages of the budget documents is a message clear as day to anyone who is mad enough to go searching for it:

We do not really have a plan for the Pakistani economy, we have no intention of fixing its major structural problems, but while we are in power, we plan on serving up a few goodies to our friends.

Let me explain what I mean.

A budget document is supposed to come up with reasonable answers to three basic questions:

Who should pay taxes?

How much should they pay?

What should be done with the money?

For our entire history, we have consistently and indisputably come up with the wrong answers to every single one of those questions. Contrary to the lies many of us were taught as a kid (especially in our Pakistan Studies classes), there has never been a government in Pakistan that got it right.

So why am I being harsh on Dar? Because not only is he not trying to make things better, he is actively making them worse.

To illustrate my point, let’s look at each of these questions in turn.

The first question: Who should pay the taxes? There are many perspectives on this, with many differing justifications, but in general, it is considered a good idea to tax richer people at higher rates than poorer people. And direct taxes (like income taxes) are generally considered more progressive and fair than indirect taxes (sales tax, federal excise duty, customs, etc.)

Now, for a concrete example.

One of the highest taxed items in Pakistan is cigarettes. This sector is taxed in the following ways: On every pack of cigarettes, there is a sales tax and a federal excise duty, which is determined by the price of the packet and the quantity of cigarettes sold.

Who is paying that tax? Well, it is being deposited in the government’s account by Pakistan Tobacco and Philip Morris Pakistan, but they are simply the collectors of this tax. In reality, it is being paid by the average customer of the khoka, who can be anyone from a day labourer to a bank CEO.

Here is where the math gets a little tricky.

Let’s take the day labourer first. Let’s assume this person makes last year’s minimum wage of Rs10,000 per month. Of that, let’s say he spends Rs500 on cigarettes a month. About two-thirds of that is taxes, so about Rs330 is going in taxes, which is about 3.3 per cent of his income.

Now let’s take a bank executive making Rs200,000 a month. This person probably smokes better brands, so spends maybe Rs2,000 a month on cigarettes. Of that, about Rs1,330 goes into taxes, which is only 0.67 per cent of his income.

You begin to see the problem with indirect taxes: the poorer person is paying a higher percentage of his income to pay the same tax, even though he is also consuming less. That makes this tax less fair.

The government also taxes the profits of the tobacco companies. Those profits are what is left over after the company is done paying its suppliers, employees, and financiers. The tax is based on the level of income of the company. Smaller firms pay lower taxes than larger ones, just as people with higher incomes are taxed at a higher rate than those with lower incomes.

So if direct taxes are so much fairer, why does the government have indirect taxes at all?

Because it is a lot easier to ask Pakistan Tobacco to jack up the prices of cigarettes and cut the government a cheque than to go and investigate the accounts of every small business and determine just how much they made in income. Our government’s policy, ever since independence, has been to tax what they can, not what they should.

Ishaq Dar made this problem worse with this year’s budget by making even some components of the income tax more like a sales tax. For instance, the government is now introducing a tax on some electricity bills that will be levied like a sales tax but adjustable against income tax. The government will call it a direct tax, but its levying mechanism effectively means that it has the same effect as an indirect tax.

The second question of what the tax rate should be is one that arouses a lot of ire, particularly among middle class people who want to sound intelligent. One of the most cited examples is that for every Rs100 prepaid mobile phone card, consumers pay Rs34.50 in a variety of taxes. Yes, a 34.5 per cent tax on cellular services seems high. But where else should the government levy the tax?

In 2013, Pakistanis spent Rs446 billion on cellular services, according to the PTA. The only other categories of consumption that saw more spending, according to data from the Pakistan Bureau of Statistics, were food (Rs4.2 trillion) and fuel (Rs1.6 trillion).

So, if you want lower taxes on cell phones, which would you rather see them raised on: milk, or petrol?

Of course, this is not to suggest that the government should have high taxes on cellular services. It should not. But the government raises rates on documented sectors in large part because it refuses to force the less documented sectors to pay up their fair share.

Admittedly, this is the one area where Ishaq Dar made some constructive suggestions. He proposed that the retail sector – the shops you and I go to – be made to share part of the sales tax burden, which is currently borne entirely by manufacturers and consumers. That is a good idea, but he laid out no real mechanism to make this work.

And true to tradition, the money keeps flowing from the poor to the rich

And on the last question of what the money should be spent on, the Nawaz Administration truly unveiled their true colours.

The provincial governments – which is where we spend money on such frivolous items as education and health – are being forced to run a “surplus” of more than Rs200 billion during the coming year.

The federal government is calling it a “surplus” but what they really mean is that they will be giving the provinces less money than they are entitled to under the constitution and the National Finance Commission award. Meanwhile, the government appears to have magically found the money to pay textile exporters a subsidy on their financing costs.

In short, schools and hospitals that serve the poorest Pakistanis will continue to fall into disrepair while textile industrialists will see their profits continue to rise at the taxpayers’ expense. Policies like these are not unique to the Nawaz administration and have been adopted quite consistently since independence. And they have real effects on the income distribution of the country.

Using data from the PBS Household Integrated Economic Survey from 2001 to 2012, I was able to track what happened to the incomes of the richest and poorest Pakistanis.

During that time – which included a moderate economic expansion, a strong boom, a severe crash, followed by a tepid recovery – the incomes of the top 20 per cent ALWAYS grew faster than inflation, no matter which time interval I looked at. For the bottom 20 per cent, incomes ALWAYS grew at less than the rate of inflation, regardless of the economic growth rate.

It is not just a cliché: the poor really are getting poorer in Pakistan.

The budget represents the choices we make about how to run our society. We seem to be choosing to subsidise the wealthy at the expense of the poor.

If that does not make you angry, I don’t know what will.