Extirpate the income tax

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VIASyed Sami Shah
SOURCEBusiness Recorder
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The tax laws in Pakistan are flawed to a certain extent. There isn’t a Pakistani who leads a life devoid from paying their fair share of taxes. There is tax on each and every commodity that a consumer consumes. There is tax on a can of soda, there is a tax on a bag of cereals, alas, there is a tax on sending remittances in and out of Pakistan. I view Pakistan as the most highly taxed country, when taking the GDP and the disparity of the wages of individuals into account. income

The taxes are way too high, and the majority of us believe that the tax system needs a major overhaul. Yet politicians and bureaucrats do not let go of an opportunity to disparage and make statements to further their agendas; hiding their lax policies, and blaming an ordinary citizen for not paying their due share when it comes to taxes. There is a majority of businessmen who have found ways to circumnavigate the tax system and do not pay an Income Tax which is proportionate to their profits and earnings. So why not abolish the income tax altogether? Replace it with a model based on the consumption of goods and services.

Also Read: Flawed tax reforms agenda — II

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Abolish the income tax and replace it with a model based on Fairness. A fair tax policy will encourage those who fall in the high income bracket to save more, and the more they spend, the more tax they will end up paying. The wealthy buy more, so they will end up paying more in taxes. Put a premium tax on luxury goods and offer a prebate on basic commodities. For instance, tax a luxury car at a 52 percent rate, whereas, abolish the tax altogether on bread. It is a win, win situation for all.

For those who like to divulge in luxuries will be forced to pay their fair share, as the retailer will price the commodity accordingly. The 52 percent I have quoted is referenced when it comes to extremely expensive commodities. The average tax could be about 30 percent, with a prebate offering for those living close to the poverty line. The basic items could be subsidized, and will most definitely meet the basic needs of families and individuals in need.

A one tax policy for all will bring fairness to the jargon that the current tax system is. Consumption-based taxes are said to be generally regressive, meaning that lower income individuals pay a greater share than those with higher incomes. The Fair Tax is designed to be more of a progressive consumption tax, with the inclusion of a prebate that would help lower-income individuals and families consume necessities tax-free. The prebate is basically an allowance equal to 23 percent of an individual or family’s yearly consumption needs based on income. But the actual tax deductions would amount closer to 30 percent.

A fair tax might also make it extremely difficult to avoid paying taxes. Regardless of the type of job you have, where your wages come from or your residency status in the country, you pay the same percentage when you buy goods and services. Under this system the only way to reduce your tax bill would be to buy less. So for someone who likes to dine out in luxury would foot the bill according to the services used. A small time food vendor would put a premium according to the geography of the area and the quality of the food and the service provided.

But the critics of the proposed tax solution might point out that, ‘What if a wealthy individual goes out to eat at a small food vendor, would that be unfair, since he will be using the same service, but paying way lesser tax, according to his income proportions?’ The experts say that the plan would be revenue neutral, since the consumption is more stable than the income earned. There are going to be far more instances where the wealthy buy expensive commodities or fine dine.

Another viable tax solution might be to tax creative, educated individuals according to the skills that they posses. In Mexico there is a programme called the Pago en Especie (Payment in Kind) which was formulated in 1957 after Mexican muralist David Alfaro Siqueiros offered to give the feds some paintings in order to stay out of jail over unpaid taxes. It is a programme where Mexican artists give a piece of their artwork to zero the tax liabilities that they have. In Pakistan, the teachers, professors, doctors, lawyers, artists and other highly skilled workforce, after a thorough vetting, could volunteer in exchange to fulfil their tax obligations.

Lawyers could provide pro bono services and teachers could teach at state-owned schools and universities in-exchange for tax deductions and eliminations altogether. Not all lawyers or people in other occupations can just contemplate entering the proposed programme. There would have to be a panel set up in each constituency to value the skill set that the particular individual possesses, and only if that individual falls in a certain criteria, should that individual’s services be exchanged for tax deductions or tax eliminations.

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Completely abolishing the income tax and using other incentives might be a difficult task to begin with, but it will lead to fairness and create a sense of belonging amongst the masses. Individuals with skills will get encouraged to work even harder, and those belonging to the lower paid stratums in our society will for once have it easy on them.

(The writer is an advocate of the high courts of Pakistan, a member of the Honourable Society of Lincoln’s Inn and the International Bar Association)

(This news/article originally appeared in Business Recorder on November 29th, 2019)

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