Article published in The News International

(https://www.thenews.com.pk/print/637923-don-t-beg-just-tax-the-wealthy accessed on

08-02-2021)

Don’t beg, just tax the wealthy

By Abid Hasan
April 02, 2020

For decades our leaders and elite have chosen to beg and borrow overseas, even to deliver the
very basic functions of state. No wonder we are known as a begging bowl country, which
doesn’t tax its wealthy but has no qualms about begging.

Every time we have a crisis, our leaders go begging around the world. It's humiliating to see
leaders living the lives of the global super wealthy, and then reaching out to the world and to
hardworking overseas Pakistanis with a bowl.

Despite Imran Khan’s electoral promise that his government would not beg, his government’s
approach to raising funds for the crisis is no different from that of PM Nawaz Sharif or
presidents Musharraf and Zardari. Like all previous leaders, the prime minister has asked
overseas Pakistanis to help, without asking the rich political and business elite to part with their
wealth. If the Pakistani elite publically forego their summer vacations in the Swiss Alps or
spending at Harrods, maybe the wealthy and ordinary overseas Pakistanis might also decide to
sacrifice monetarily.

It was disappointing that in his speech on March 30, the prime minister did not announce any
personal donation to the Corona Fund. As a minimum, being the PM, and a rich one, he should
donate 5-10 percent of his wealth. He would then be on a high moral ground to ask expatriates
and local Pakistanis to help out or request foreign governments to provide grants or write off
debt. The point is that as long as our leaders and elite do not sacrifice, our pleas for help will fall
on deaf ears. And if foreign governments give grants or convert loans to grants, we should keep
in mind that there are no free lunches. As we have learnt from our 70-year history, generosity
from the US or the Gulf countries has come at a heavy price.

Before Pakistan goes out begging and borrowing, the prime minister must explore all the
avenues to tax the wealthy. How he manages the economic crisis will be the test of his
leadership and his resolve to make Pakistan a respectable nation. Below are a few actions to
raise money from the rich to enable Pakistan to weather out the crisis.
Using emergency powers, enacted through an ordinance, the prime minister must impose a
‘one-time’ wealth tax on several sources of wealth. But before that, he should require all
national and provincial legislators, except for the few who are middle income, to symbolically
contribute as follows: (i) foregoing their salary and perks for the next 12 months; (ii) paying an
amount, equal to the most expensive car they drive, into the PM’s special fund. Symbolically he
should personally contribute at least Rs100 million, given his enormous wealth. These actions
would send a powerful signal that those who govern also contribute in times of crisis.

First, the government should consider a one-time wealth tax on the following two classes of
assets: (i) wealth tax on real estate – homes and commercial real estate above a value of, say,
Rs20 million. There are close to one million expensive homes/plots in cities. The value of these
homes/plots, and commercial buildings, would easily run into several trillion rupees; (ii) wealth
tax on owners of three million cars registered in Pakistan – especially cars above 1000 cc. There
could be a small wealth tax on cars between 1000 and 1500 cc, and hefty tax on luxury cars and
SUVs which are less than five years old. The aim should be to raise, from these two sources, at
least Rs100-150 billion, passing the entire tax to the provinces (as tax on property and vehicles
is in their domain) for them to fund their crisis response programmes.

Second, taxing the 30-40,000 holders of listed shares, Pakistan’s super wealthy who have
benefitted for over two decades from the tax haven called the PSX. The current wealth of their
holdings (ie market capitalization) is around Rs7 trillion, on which they have hardly paid any tax.
The government should consider a one-time 10 percent wealth tax. These people will, most
likely, have to sell their share holdings which will further depress the market. But so be it.
Besides, it will have absolutely no adverse impact on the economy or the 200 million citizens
who are not invested in the market. Pakistan should raise at least Rs500-600 billion from these
super wealthy.

Third, imposing wealth tax on the rich holding around 40 percent of bank deposits – deposits
over Rs5 million add up to around Rs6 trillion. One could consider a one-time 2-5 percent
wealth tax, lower rate for those with Rs5 million deposits and higher for those having deposits
of over Rs20 million. The government could raise about Rs 75-100 billion.

Fourth, raise taxes on petroleum products and rescind the recent reduction in prices. The price
of petrol and diesel in Pakistan is among the lowest in Asia and Africa. It is lower than Nepal,
Bangladesh, India, Uganda, Kenya, Vietnam, etc. At present, the tax on petroleum products is
around 25 percent of the retail price. Last year, petroleum product sales amounted to about
Rs3 trillion, which included around Rs750 billion of taxes. The aim should be to raise taxes to at
least 50 percent. While one can devise an easy mechanism to directly subsidize (through
EasyPaisa or MobiCash) owners of 2 and 3 wheelers and tractors, all other users must pay a
higher price so that an additional at least Rs500-600 billion is raised.

Finally, getting relief from high cost domestic debt. The call for debt relief from external
creditors is not justifiable, especially when in the past we have squandered debt relief. The PM
should also not try to be a world statesman asking for debt relief for poor countries, majority of
which are run by corrupt political and business elite like ours. Pakistan got a huge Paris Club
relief, when we joined the ‘war on terror’, but none of that has led to any improvement in the
lives of ordinary people or better health and education for the poor. Moreover, if we need to
free up resources from debt relief, then we should first seek relief on domestic debt – 65
percent of public debt is domestic and 90 percent of debt service is on account of domestic
debt. Our problem is domestic debt, not foreign debt.

Hence, we should extract debt relief from wealthy Pakistanis, banks and corporates who hold
the bulk of domestic debt. One way is to dramatically drop all interest rates to a low single digit,
for the next 12-18 months. Another way is to tax interest income at, say 50-60 percent, on the
current stock of domestic debt, and not allow any withdrawals. This would bring the effective
cost of domestic debt to a low single digit. If we get wealthy holders of domestic debt to give
relief to Pakistan at the time of our current crisis, PM Khan would be on strong moral ground to
seek debt relief on foreign debt. This action could yield Rs500-600 billion, and would send a
clear message that the wealthy elite are sacrificing to help with the corona crisis.

All together, the above actions could yield around Rs1.5-2 trillion of additional resources for
funding the corona crisis. This may be a stretch target, but Prime Minister Khan must display
the courage to tax the wealthy and set a personal example. It is the only way Pakistan can get
rid of its begging bowl DNA, and subsidize tens of millions of poor to avoid a social meltdown.

Finally to avoid begging the IMF again, Pakistan should impose temporary restrictions to shore
its foreign reserves. These could include high cash margins on non-essential imports, and
restrictions on foreign outflow of FDI dividends and IPP contracts, withdrawal of ‘hot money’
etc. Dozens of countries in crisis have imposed foreign exchange restrictions, even defaulting on
foreign loans several times over, without any long-term reputational risk.

So Pakistan need not worry about any reputation risk arising from imposing temporary
restrictions. Moreover, the PM should not be carried away by the sweet talk by the IMF or their
praise of the IMF staff managing the SBP. The IMF Board is only interested in lending targets,
but no one in the IMF will get fired if poverty in Pakistan increases because of the IMF
programme.

The writer is a former adviser to the World Bank.