Foreign Aid

Defunct tax system harms Pakistan’s poor

(Aug. 6) Global Envision’s Lila Wade argues that Pakistan’s broken tax system is making poverty worse in the country.

Pakistan’s economy is growing, but only the upper crust of society enjoy the gains.

Pakistan’s economy has grown each year since 1951, despite severe drought, political instability, and the global recession. This economic success is apparent in the Times’ description of high-rolling lifestyles in Islamabad [PDF].

Much of Pakistan’s capital city looks like a rich Los Angeles suburb. Shiny sport utility vehicles purr down gated driveways. Elegant multistory homes are tended by servants. Laundry is never hung out to dry.

But, while some are well-off, many still struggle to get by. Pakistan ranks in the bottom quarter of the Human Development Index in terms of quality of life. And more than 60 percent of Pakistan’s population gets by on less than $2 a day, according to UNDP figures. Two professors from the Lahore University of Management Science argue that Pakistan’s skewed tax system is a driver of poverty:

The single most devastating factor for increased income and wealth inequalities in Pakistan remains the regressive tax system. Incidence of tax on the poor in the last 10 years has increased substantially (by about 35 per cent), while the rich are paying almost no direct tax on their colossal income and wealth.

The skewed tax system [PDF] in Pakistan contributes to poverty by increasing income disparities and redirecting funds for social spending back in to the pockets of the rich, explains the New York Times. But only about 2.5 million out of an estimated 10 million who should be paying taxes actually cough up the money estimates Akbar Zaidi, a political economist with the Carnegie Endowment. As a result, Pakistan has had to apply for a $10.66 billion loan from the IMF.

All in all, the rich gain either because they don’t have to pay into the system, or because, when they do, they reap the benefits. In an effort to get some of the lost tax dollars, local communities have adopted a creative strategy. They’ve started paying transvestites to rap on the doors of the wealthy and collect owed taxes. The New York Times captured these “tax collectors” all dolled up in heels and full make-up, but also swathed with the Islamic hajab in a recent video. Often the rich will pay up just to avoid having these “outcasts” linger.

But, this localized effort is really just a stop-gap measure until real reform is achieved. Many look to the U.S. as the necessary catalyst for change say watchdog groups, such as Probe International. The U.S. essentially subsidizes Pakistan’s economy [another PDF here] by providing billions in foreign aid, giving the Pakistani government little incentive to reform the tax system. Thus, indirectly, U.S. aid inevitably hurts Pakistan’s poor.

Many are fed up, such as Zaidi, the Times reports. Zaidi believes “[t]he Americans should say: ‘Enough. Sort it out yourselves. Get your house in order first. But you are cowards. You are afraid to take that chance,” he challenges.

Read the original article here. [PDFver here]

By Lila Wade, Global Envision, Friday, August 6, 2010
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Categories: Foreign Aid

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