Anatomy of Pakistan’s tax system
Adam Smith (1723-1790) was a Scottish thinker who was called the “father of economics”. His magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, is the first modern work to treat economics as an academic discipline.
He was probably the first to analyze the distribution of resources in terms of geographical, political, social, economic and technological factors, rather than the decadent and traditional idea of wealth as the result of divine distribution. His work on the economics of modern taxation is still considered pioneering work on the subject.
In the second chapter of his book, he establishes four canons of good taxation, namely: “I. The subjects of every state ought, according to their ability, to contribute, as far as possible, to the maintenance of the government; that is, in proportion to the income earned under the protection of the state… II.
The tax to be paid by each person must be certain and not arbitrary. The date of the payment, the method of payment, and the amount to be paid must be clear and unambiguous for the contributor and anyone else…. III.
All taxes must be levied at a time or in a way that is most convenient for the taxpayer to pay… IV. Every tax should be designed so that it takes as little as possible and stays in people’s pockets in addition to what it brings to the public treasury of the state…”
These principles are now called i)l Horizontal and vertical equity. (criteria of ability to pay and benefits received), ii) clarity and iii) least distortion of economic efficiency remain the cornerstones of any efficient and modern tax system in the world.
Later work by FP Ramsay, James Mirrlees, Michael G Allingham, Agnar Sandmo and Das Gupta provided insights into the desired political goals of tax policy and the methods of compliance and most taxation in developing countries. this provides a strong theoretical basis for their efforts.
In contrast, our tax system remains a largely extractive mechanism from the state, with significant inefficiencies, a narrow and shallow base, high levels of horizontal inequality and minimal compliance. Most taxes are collected using the medieval control tax collection method, which collects the tax when the transaction passes through an entry/exit.
Published in EDP BLOGS on August 14,2023.
