Posted June 27, 2013 by Faisal Bari

Marginal tax rates, for the highest income bracket, have been raised to 35 percent. This is a significant increase. In addition, sales tax rate has been increased and a number of taxes have been imposed on products and services that the more well off consume: for example, on fees for sending to children to high fee private schools. Ishaq Dar, the Minister for Finance, in a public statement post budget presentation, said that people should support him as he was taxing the rich.

The rich should pay more in taxes than the poor. This is, for most people, not a debatable issue. Higher rates for the rich can be justified on the basis of diminishing marginal value of money. And for most of the rich, this is not what rankles, even though few part with money gladly. What rankle are the unfairness of the system and the lack of delivery on promises.

The salaried, from the formal sector, make the bulk of the taxpayers in the income tax net. They cannot hide their income. The government is continuing to milk them. The rise in income tax will mainly hit the professionals who are in the high-income bracket. Most of the people who have high incomes, but from agriculture and/or businesses, are not in the tax net. They will not pay for the rise in tax rates. How is this fair?

In our neighbourhood there are a couple of high salary professionals. They claim they are paying more than 50 percent of their income in taxes. These include income tax, sales tax and all the other taxes and levies on specific goods and services. In the same vicinity lives a factory owner who has 4 luxury cars in his porch, including a nice Mercedes, runs his house on a diesel fueled generator but pays one tenth of the tax that the salaried are paying. Whenever the conversation turns to paying taxes, the factory owner says he is creating jobs and supporting x number of families, is responsible for generating this much export and that much local productive activity. He is also a part of various interest groups, locality and industry based, who have been organized to resist any and all attempts by the state to extract taxes for group members.

The budget had not addressed this unfairness and it definitely rankles for all who are in the income tax net and have been law abiding and responsible citizens. There were no specific initiatives on how the government is going to widen the tax net to include those who are currently not paying their share. Would it be surprising, if the unfairness is not addressed, if the honest taxpayers start contemplating ways of skimping on tax payments?

Taxation is for providing services to the people. Taxpayers find that even though they pay, they do not get back much from the state. They send their children to private schools, have to use private health/medical service providers when needed, have to hire private guards, depend on private supply for drinking water and have to pay separately for use of roads and bridges. So, what exactly do they pay for when they pay more than 50 percent of their income in taxes?

For many people it would still be fine if the state could provide decent quality health, education and other necessary services to the poor. But the state fails to do that. And miserably. Instead all we hear of are stories of corruption and incompetence, irrespective of the department in question. Should the taxpayer pay for corruption and incompetence?

There is, of course, unlikely to be a revolt in the taxpayers. They are not organized enough or numerous enough. But if the state continues to milk those who happen to be in the net, does not succeed in extending the net and cannot start delivering on promised goods and services, for the rich or even for the poor of the country, individual incentives to pay taxes will continue to erode and people will start looking for options. In this case there is no such thing as a ‘honeymoon period’ for the government. If they do not start delivering on promises soon, the attitudes of existing taxpayers, sour enough, are likely to turn a lot sourer.

Disclaimer: The views expressed here are those of the authors and do not necessarily represent the views of the Institute of Development and Economic Alternatives