I was fortunate enough to spend the past month shadowing one of Pakistan’s leading constitutional lawyers (For privacy’s sake, I will omit his name). A talented jurist, he would roll into court with reams of case law, a thick folder – containing the petition, affidavits, counter-affidavits, rejoinders, what have you – and an excellent memory. He would dazzle some judges and piss off others with his often novel theories about why such and such law was ultra vires or unconstitutional. As I sat there in the hot and stuffy court rooms of the High Court, I noticed that the majority of his cases and those of other prominent lawyers were about taxes. The clients had been taxed too much, or the clients simply didn’t want to pay some taxes, so they went to lawyers to figure out ways to avoid paying them. Given the poor drafting, implementation and execution of laws, it goes without saying that the lawyers didn’t have too much trouble striking down seemingly valid taxes.

What’s happening in the courts is just the tip of the iceberg. These are some of the bigger players in the Pakistani economy, and they can’t easily escape the scrutiny of the Federal Board of Revenue, the national tax collector. They, at the least, are seeking a legal way of avoiding taxes. While there are about three million registered taxpayers in Pakistan, only about two million – about 1.1 percent of the entire population – file tax returns. That number excludes the fact that most of those taxpayers do not declare significant parts of their income by way of complex legal maneuvering, tax code loopholes, or simple misrepresentation. If a tax investigator starts asking questions, a bribe can usually make him look the other way.

Nobody anywhere likes paying taxes. There’s a saying, attributed to American Founding Father Benjamin Franklin, that encapsulates this universal antipathy: Nothing is certain but death and taxes. But in Pakistan, the former is almost always assured and the latter is rarely certain.

The scope of the Pakistani tax problem has recently amplified, as the country experiences historically high inflation (14.5%, according to official figures. The true figure is perhaps a few percentage points higher). Pakistan relies on foreign aid for a large chunk of its budget at a time when it’s struggling to reassert its sovereignty and to forge an independent foreign policy. And as long as it continues to rely on American aid to prop up its institutions, the Pakistani government cannot reasonably assert any sovereignty. This has lead members of the Pakistani media to demand the political leadership to increase the tax base. Almost daily now, a news talkshow host will decry the the woeful neglect of the taxation system. The problem, however, isn’t a lack of a well developed taxation bureaucracy. Pakistan’s FBR is descended from the British Empire’s Indian Civil Service’s efficient structure, and today is a modern, functioning organization. The problem, as Emma Duncan identified in her book Breaking the Curfew, published in 1989, is that Pakistanis simply don’t want to pay taxes. She noted that a study of the country’s tax system found no shortcomings in the bureaucracy’s management or its structure. So then we’re left to ask: why don’t Pakistanis want to pay taxes?

During a major tax case involving billions of rupees and hundreds of businesses in the province of Sindh, the judge interrupted the businesses’ lawyers as they presented their initial oral arguments. He went on a tirade about how prominent lawyers come into his court room everyday to challenge the validity of tax laws. He then pointed out the stark contrast between Pakistan and India’s tax revenue to GDP ratio. India’s is a modest 18%, but Pakistan’s lags at an inadequate 9%, he said. The two countries inherited the same tax bureaucracy structure, and yet the difference is significant.

Mosharraf Zaidi, of The News, has authored an insightful op-ed, offering an explanation for the high rate of tax avoidance in Pakistan. He argues that the disconnect stems from the lack of a social contract:

Pakistan is a state and society operating without a modern social contract. The state exists and persists without a linear fiscal relationship with the people. In plain English, the state is unaccountable to the people of Pakistan because the people of Pakistan do not pay taxes. The state doesn’t “owe” the people any services, or answers, and the people don’t feel that they owe the state any money.

It’s the chicken and the egg conundrum. Pakistanis do not pay taxes because the state is not accountable. And the state does not feel accountable to the citizenry because they do not foot its bill. There is no social contract to bind the two. It’s a compelling argument, and anecdotally, it’s constantly affirmed when you ask Pakistanis why they don’t pay taxes. The common response invokes corruption: if we pay, then it goes to the pockets of corrupt politicians and bureaucrats, so why bother. But I’m not entirely convinced that corruption alone is the problem. Take, for example, India, a state that’s equally corrupt. Yet, India manages to recuperate almost twice the percentage of tax in relation to GDP.

Above, I mapped out the tax revenue to GDP ratio figures (courtesy: Heritage Foundation) of about 167 countries against Transparency International’s Corruption Perception Index. I found a Pearson correlation coefficient of around 0.497, indicating a positive correlation between tax revenue to GDP and corruption. This reflects a medium strength of association. Of course, this test should be taken with a grain of salt. It doesn’t, for instance, account for the real figure we should be measuring: the tax gap, that is, the estimated difference between the tax owed and the tax paid per jurisdiction. Tax revenue to GDP is but a rough measure of the tax gap; it assumes that there is a general positive relationship between tax owed and tax paid, and that this gap is universal. And it isn’t. But what this graph does show us is that there is some relation between the perceived corruption in a country and its citizens’ willingness to pay tax.

And this supports Mosharraf’s original contention. The social contract is not just about corruption, however. It creates that abstract link of faith between the government and its citizens that if the citizens pay taxes, then the government will deliver. I concur that Pakistanis lack that abstract faith in government. Despite the roaring popular nationalism that floods airwaves and television screens, Pakistanis, like anyone group of people, ultimately vote with their wallets. And this aversion to paying taxes is about more than corruption. It’s reflective of a state in taters and a people with no confidence their leaders. We are then to conclude with a twist on an old adage: without taxation, there can be no representation.

Advertisements