Should donors boost aid to Pakistan if it won’t tax its élites?

The U.S.-based Tax Analysts has just published a fascinating article with the bland title Should Donor Countries Push Tax Reform? The answer, we think, is generally ‘yes’ – though it depends, of course, what we mean by ‘reform.’ The article notes:

It’s no secret that Pakistan’s tax-to-GDP ratio is one of the worst in the world. According to the FBR’s most recent report on its performance in 2012-2013, the tax-to-GDP ratio dropped to a dismal 8.5 percent, down from 9.1 percent in 2011-2012

“An April 4, 2013, report from the U.K. House of Commons International Development Committee (IDC) examined the rationale for the Department for International Development’s (DFID’s) decision to increase aid to Pakistan from £267 million in 2012-2013 to £446 million in 2014-2015, which would make the country the top recipient of U.K. aid.

“If the Pakistan government is unwilling to take action to increase its revenues and improve services for its people, it cannot expect the British people to do so in the long run,” the IDC said in the report. “We cannot expect the citizens of the U.K. to pay taxes to improve education and health in Pakistan if the Pakistan elite is not paying income tax.”

This is not the first time powerful global players have questioned the wisdom of subsidising a Pakistani tax-evading élite. In 2010 we cited U.S. Secretary of State Hillary Clinton, along similar lines:

“This is one of my pet peeves: Countries that will not tax their elites but expect us to come in and help them serve their people are just not going to get the kind of help from us that they have been getting . . . Pakistan cannot have a tax rate of 9 percent of GDP when land owners and all of the other elites do not pay anything or pay so little it’s laughable, and then when there’s a problem everybody expects the United States and others to come in and help,” Clinton said to a round of applause.”

Or U.S. envoy Richard Holbrooke:

“We can’t ask American taxpayers to pay the burden if the Pakistanis don’t raise their own revenue.”

And things in Pakistan are pretty bad. Tax Analysts quotes a report by the Pakistani nonprofits Centre for Investigative Reporting in Pakistan (CIRP) and Centre for Peace and Development Initiatives, which showed that nearly half of all lawmakers who won in Pakistan’s May 2013 general elections paid no income taxes, and that more than 10 percent didn’t even have national tax numbers, which are required in order to file tax returns.

Tax Analysts also quotes us:

“John Christensen, director of the Tax Justice Network, agreed that a top-down approach to tackling tax evasion is ideal, since individuals in the lower social classes are likely to have little incentive to pay their taxes if wealthier people can easily avoid theirs.

“A fish rots from its head,” he said. “Any attempt to tackle corrupt tax practices should start at the top, preferably with complete abolition of all tax exemptions given to politicians and a massive rolling back of exemptions to rentier and business elites. Leading by example is the best way forward.”

While Christensen opposes conditional aid in general, he sees a strong case for donor countries to make aid conditional on the creation of a progressive, fair, and transparent Pakistani tax system. External aid inflows may have had the unintended effect of alleviating pressure for reformation of Pakistan’s regressive, exemption-ridden tax system, which is undermined by tax evasion among the country’s rich and powerful. However, if aid were conditional on tax reform, Pakistani politicians, which have become reliant on that aid, would be made more accountable to external donors than to their electorates.

“The goal must be to reduce dependence by substituting tax revenues for aid flows,” Christensen said.”

Well said that man. One for our new page on aid, tax and state-building.