November 26th, 2010 by Cy
FIRST things first. The reformed general sales tax (RGST) is bad for consumers. Which means it’s bad for the poor and the less well-off. The reason is pretty straightforward. RGST is an indirect tax, i.e. a tax on goods and services. Which means it will get passed on to the end consumer, which includes the poor and the less well-off.
Yes, the government wants to harp on the positive aspects, for obvious reasons: new taxes on leather goods and carpets, for example, are unlikely to hurt the poor because they don’t use carpets or leather goods.
But look at all the stuff that is getting taxed. And for that we need go no further than the information ministry’s six-page handout on RGST. ‘Surgical items’ — which means your next trip to a doctor may cost more. ‘Pharmaceuticals (other than life saving)’ — which means the next time you have a mild illness you’ll pay more to get better. ‘Stationery items, dairy products’ — self-explanatory.
But, and here’s the rub, there is a very different kind of problem which has ravaged the poor in recent years: inflation. In part, the fiscal deficit the country has been running has helped keep inflation high. Now, with the floods having added colossal expenditures to the overall budget, the fiscal deficit, in the absence of revenue-generating measures, would balloon again — further driving up inflation.
So for the poor and the less well off, it may be a case of damned if they do, damned if they don’t: fight off (theoretically) RGST and inflation would rise; accept RGST and end up paying more from their pockets.
There is, of course, a better solution: tax something else, or someone else, i.e. the rich. Which is why the government has cleverly weaved in the ‘flood tax’ on incomes. People and businesses paying income tax, a tiny percentage, will for six months have to pay 10 per cent more income tax. It’s really just a ruse, allowing the government to claim that it is moving towards a fairer tax system.
In truth, at the end of the six months, the country will have an inarguably more unjust and more inequitable tax system, because by then the RGST regime would have permanently expanded indirect taxes while direct taxes, i.e. income tax, would return to the original, low, level.
To understand why this happens, you need to know something about your politicians and how the state succumbs to special interests. Finance Minister Hafeez Sheikh gave an insight into this world earlier this week when he candidly admitted that as late as 11.30 the night before this year’s budget speech he was receiving calls pressing him to exclude a capital-gains tax on the stock market.
The rich not only know how to protect themselves, they are far more organised and serious about it than the average person. The average schmuck working nine-to-five for a pittance will bend to the government’s will and pony up the extra 10 per cent income tax (realistically, he will have no option because it will be deducted at source by his employer).
But the big boys have a bagful of tricks that the average schmuck can only dream of. Access is of course one thing. Hafeez Sheikh is notoriously inaccessible to the media. But stock-market kingpins lobbying against a capital-gains tax on their business can reach him at half eleven the night before the federal budget is unveiled.
Even better than access, however, is being there yourself to look after your interests. Sorry, we can’t tax agricultural income because it’s a provincial subject. Oh, how did that happen? Well, y’know, we transferred it to the provinces in the 18th Amendment. Oh, you mean the provinces where the big landlords control more seats? Yeah, but it was all about strengthening the federation. Straight face.
Is there any hope of a better, more just system emerging? At present, no. There is no will for it nor is there the capacity. The clumsiness with which the government has handled the RGST issue is indicative of that. A systemic overhaul or deep reform by these guys, in this incarnation, at the present time, is extremely unlikely.
But consider this: the most politically damaging thing a government could do — pare down subsidies at a time of soaring inflation and low growth — this government has done. Why?
Economics and finance have a logic of their own, logic that every government eventually has to bow before. In 2008, the option was to either embrace the IMF or slide towards economic oblivion. Purists may argue about that, but it was effectively the only choice in the real world where politics and economics intersect.
The same goes for the business of taxation. Eventually, economic logic will kick in. It’s happened already while setting the rate of RGST: 15 per cent, two per cent lower than the existing standard rate. In this year’s budget, the government experimented with a temporary, one per cent increase in the sales-tax rate. The consequences have been inevitable.
While in the short-term the demand for goods taxed stays more or less constant (people take time to adjust habits and consumption patterns), it eventually begins to sag — higher price translates into lower demand, meaning you can’t infinitely raise or rely on indirect taxes.
So it will be with RGST. It really is a band-aid solution, meant to nominally increase the tax-to-GDP ratio in the medium term. Eventually, other measures will be required.
At that point the RGST Trojan Horse may be tapped: once you’ve documented the production and supply chain, as the RGST aims to do, you’ve got proof of how much business so many more businesses are doing.
At present, only the retail level is captured by sales tax. But under RGST, which is really the value-added tax by a different name, the tax machinery will learn about the activities of manufacturers, marketers, distributors and wholesalers — exponentially increasing the potential targets of the taxman for things like income tax.
The problem? The same as always: special interests. What the taxman can document, the politician can scuttle. Just like agriculture and textile special interests have worked to keep those sectors largely out of the tax net, so will other, newly taxed sectors work to acquire clout in the corridors of power.
But then in the end they will still have to make a choice: do they want Pakistan to swim or sink economically?
At that point, you better hope you have a lifeboat handy.
Source:
http://www.cyrilalmeida.com/2010/11/...cyril-almeida/