FeaturedNationalVOLUME 18 ISSUE # 45

IMF’s advice: tax the rich, not the poor

The International Monetary Fund has given the lie to the oft-repeated official statement that the Fund is forcing the government to increase the tax burden on the poor sections of society.

In a recent statement IMF Managing Director Kristalina Georgieva has urged Pakistan to “collect more taxes from the wealthy and protect the poor people” amidst soaring inflation. Speaking to the media recently, the IMF MD said: “What we are asking in our programme is that please collect more taxes from the wealthy and please protect the poor people of Pakistan. I do believe this is in line with what people in Pakistan would like to see for the country.”

Pakistan’s inflation figure has reached 40 percent, which has completely upset household budgets. Exorbitant electricity bills have led to countrywide protests. But the government has refused to provide any relief to the consumer, citing Pakistan’s commitments with the IMF. Now the cat is out of the bag. Not the IMF, but the government itself is responsible for increasing price pressure on the helpless masses.

This is not the first time that the IMF boss has urged Pakistan to tax the wealthy to boost its tax revenues. A few months back she pointed out that in order to put its economy on an even keel, Pakistan must ensure that the wealthy should pay their due taxes so that the poor may get subsidies. But here it is the other way round. In Pakistan the poor are taxed heavily so that the elite classes can live a luxurious life.

Our tax system is highly unjust and lopsided which is the root of all our economic woes, including rising fiscal deficit, elevated inflation, a low investment rate and a weak balance-of-payments position. No government in the past seriously tried to tackle the problem. The previous PML-N-led ruling coalition did not heed the IMF’s advice. The last budget in June failed to address the root cause of the nation’s ever-dwindling tax revenues as it avoided bringing undertaxed and untaxed sectors such as real estate, agriculture and retail effectively into the tax net. Instead, it increased the tax burden for the salaried class and the corporate sector to meet the revenue goals of the IMF for a new bailout programme.

Pakistan’s tax system has long been criticized for favoring the wealthy and perpetuating income inequality – a system which has shattered the socio-economic fabric of the nation. A fair tax system should be based on the principle of progressive taxation, where individuals with higher incomes pay a higher percentage of their earnings in taxes. In Pakistan, however, this principle has been ignored. A significant portion of tax revenue is generated through indirect taxes, such as the General Sales Tax (GST) and customs duties, which disproportionately affect low and middle-income groups. These regressive taxes put a heavier burden on those with less disposable income, while the wealthy often find ways to evade or minimize their tax obligations through loopholes and tax planning.

Another problem is that Pakistan has a sizable informal economy, which includes businesses and individuals that operate outside the formal tax net. The informal sector accounts for a substantial portion of economic activity, yet it often evades taxation. The burden of taxes thus falls more heavily on the formal sector, where the wealthy are better equipped to exploit tax exemptions, deductions, and other legal provisions. This imbalance not only exacerbates income inequality but also hinders the government’s ability to collect revenue for essential services.

Tax evasion is a widespread evil, with both individuals and corporations finding ways to underreport their income or hide assets. This problem is further exacerbated by weak tax enforcement mechanisms, corruption within tax authorities, and a lack of political will to pursue tax evaders vigorously. Wealthy individuals and powerful corporations often employ legal and illegal means to reduce their tax liability, while ordinary citizens bear the brunt of an underfunded public sector.

The inequitable tax system in Pakistan has far-reaching consequences for the country’s social safety nets. With limited tax revenue generated from the wealthy, the government has insufficient resources to provide essential services such as healthcare, education, and social welfare. This places a heavier burden on the marginalized and vulnerable segments of society, exacerbating poverty and inequality.

Pakistan’s iniquitous tax system, which favors the rich, is a pressing issue that hampers the nation’s socio-economic progress. To address this problem and bridge the economic divide, Pakistan must undertake comprehensive tax reforms. These reforms should prioritize progressive taxation, strengthen enforcement mechanisms, formalize the informal economy, and consider implementing an effective wealth tax. Simultaneously, the government should invest in social safety nets to ensure that all citizens have access to essential services, regardless of their income level. Only through these concerted efforts can Pakistan hope to build a fairer and more equitable society where the tax burden is shared more justly among its citizens.

With one of the world’s lowest tax-to-GDP ratios of 8.6pc, Pakistan has been running a fiscal deficit of more than 7pc for the last several years because of the rulers’ unwillingness to expand the tax base. It is time the government paid heed to what the IMF has been asking it to do: tax the rich and provide relief to the poor classes.