Wealth Tax is retrogressive

ISHAQ DAR, while addressing a seminar at the launching ceremony of the first ever annual report of the Institute of Public Policy of Beaconhouse National University, a few hours prior to the decision to resign as the Finance Minister was taken, hinted at the possibility of the imposition of a wealth tax. Dr Hafiz Pasha, addressing the same forum, lamented the fact that the abolition of wealth tax and reduction in tax rates had resulted in a net loss to the exchequer of Rs 300 billion. Over the last five years tax collection has gone up substantially on account of tax reforms; however, tax-to-GDP ratio instead of showing improvement has come down. The target for a two percent improvement still looks distant. The exchequer is sorely in need of massive injections of revenue at the present moment in time. The disturbing fact is that the economy is in a downward spin, made possible due to the multiplier effect, as the rate of growth of the economy slows. This will also negatively impact on revenue collections in the forthcoming fiscal year. Until and unless additional taxes are imposed or the ambit of existing ones enhanced, there is likely to be a decline in revenue generation which would put further pressure on the ability of the government to ensure basic essentials for the poor. It is also fairly evident as to why the obvious choice for a popularly elected government would have been the wealth tax: its very name that smacks of an equitable tax that is levied only on the rich. However this is merely a misconception. Wealth tax has been abolished in most countries of the world, including Pakistan, for one simple reason: it is seen as a disincentive for those involved in the process of investment and thereby wealth creation - a process that generates employment opportunities as well as propels the growth rate of the economy that, in turn, leads to higher tax collections.
In contrast, imposition of wealth tax may well lead to capital flight while, at the same time, act as a disincentive to increasing levels of investment. Thus wealth tax in the long run is a self-defeating exercise if the objective is to promote economic activity in the private sector or increase revenue generation, as it appears to be as far as the present government is concerned. If one adds the element of a large illegal parallel economy operating in Pakistan one is confronted with the fact that there are disincentives in the tax structure that have led to several entrepreneurs opting to stay out of the legal economy. In this scenario to consider imposing a tax on wealth may well spur a growth in the undocumented sector of the economy and be detrimental to achieving the overriding objectives: an increase in employment opportunities, lower inflation and higher revenue. Since there is very little time left for finalisation of Budget FY09, the challenge for the budget makers is on the revenue side while expenditure heads are well known. The Pasha report has rightly advised imposition of regulatory duty on non-essential imports estimated at around 20 billion dollars. Five percent regulatory duty will fetch Rs 100 billion. Coupled with a cut in PSDP by Rs 100 billion will reduce the fiscal gap by two percent of GDP. Absorption capacity for full utilisation of PSDP is not there anyway. The ambit of federal excise duty covering the services sector needs to be expanded. Higher collection on this account will help fetch more revenue for the provinces. We cannot have capital gains tax on equities together with capital value tax on shares traded.


Identity politics

ONE of the salient features of the Indian Constitution is Part III relating to Fundamental Rights. Article 19 (Right to Freedom) enshrines, among others, the right of a citizen to move freely throughout India, and to reside and settle in any part of the country. Over the past nearly half a century, since the Constitution came into force, many attempts have been made by extra-constitutional forces, including political parties, to impose curbs on the movement of citizens. The most recent, and egregious, assault on this right is the hate campaign launched by Raj Thackeray — whose uncle Bal Thackeray founded the Shiv Sena and built his political empire on the basis of such parochial attacks on ‘outsiders’ — against poor north Indian migrants. While Raj walked out of the Sena following a quarrel with cousin Uddhav, his Maharashtra Navnirman Sena’s vicious attacks — both verbal and physical — against north Indians in Mumbai have won the grudging admiration of the original proponent of narrow identity politics. Today, both the Senas are dabbling in a dangerous game of divisive politics, berating hapless migrants from relatively poorer states like Uttar Pradesh and Bihar, in a desperate bid to win over Maharashtrian voters. With both general and state elections due to be held next year, the other mainstream political parties appear to have been bludgeoned into opportunistic silence. Even the Maharashtra government is hesitant to act against Raj and his cohorts despite his provocative speeches.
Mumbai, like other cosmopolitan and vibrant metropolises around the world, has lured migrants from different regions, skilled and talented individuals who have contributed tremendously to the success of the city. India is currently witnessing one of the great migrations in human history, with millions of rural poor seeking opportunities in cities. Lack of urban development had made Mumbai a magnet for migrants; but with the government now spending billions of rupees on building new cities around the country, India’s financial and commercial capital will soon face competition, as migrants head for places with better opportunities. Maharashtra itself has emerged as one of India’s most progressive and economically advanced states thanks to forward-looking leaders who have over the years encouraged the migration of human resources and capital to the state. Both the central and state governments are now keen to make Mumbai an international finance centre, on the lines of London and Hong Kong. But if the authorities fail to rein in petty politicians like Raj Thackeray, or provide protection to vulnerable migrants, there could be a flight of capital from Mumbai. Or worse, the state could see talented people voting with their feet and heading for other more hospitable places.

—Khaleej Times