Pakistan and stark parallels to France’s notorious Ancien Régime
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Historical analogies must be approached with caution, but the conditions in France under the Ancien Régime and contemporary Pakistan, despite being separated by centuries and continents and each possessing unique complexities, offer a lens through which to examine the pressures within Pakistan’s political structure and the potential consequences of its inability to reform in the face of an economic crisis.
The taxation regime in pre-revolutionary France was derided as “excessive, inefficient and unfair.” It was excessive because, in the late 18th century, France became one of the highest taxing states in Europe, driven by spending on its army, expanded bureaucracy, and profligate monarchy. It was inefficient because it encouraged corruption and tax avoidance. It was unfair because most of the nation’s direct taxation was levied on the Third Estate— the common people. The privileged First and Second Estates, the clergy and the nobility paid little or no taxes despite possessing much of the wealth.
“Excessive, inefficient, and unfair” could just as well describe the Pakistani tax regime and the political economy underpinning it. The ruling coalition recently approved a budget designed to generate considerable additional tax revenues to cover bloated public spending. These expenditures include generous pay raises for an inefficient bureaucracy responsible for executing wasteful projects. Historically, public sector schemes have failed to uplift human capital or act as a GDP growth multiplier. Many projects suffer from considerable cost overruns and delays that erode their financial viability and social impact. Nevertheless, the governing class continues with escalating profligacy while placing the burden of more revenue generation on those already heavily taxed.
Under pressure from the IMF to broaden the tax base, the government has moved to impose capital gains tax on property transactions, and provincial governments have agreed to align taxation on agricultural earnings with non-salaried personal income taxes. However, if the provincial budgets are any guide, only an insignificant amount of taxes is expected to be generated from these sources. Similarly, the retail sector remains largely exempt from taxation. The privileged few who influence policymaking are not only the main beneficiaries of public spending but also avoid contributing to state coffers.
“Excessive, inefficient, and unfair” could just as well describe the Pakistani tax regime and the political economy underpinning it.
Javed Hassan
The Finance Minister has criticized the Federal Board of Revenue for corruption and inefficiency, hoping digitization will transform the tax collection behemoth and significantly increase revenue. Successful implementation will require the collection and cleaning of vast amounts of data to identify key revenue-generating sectors and individuals. But just as importantly, it also needs an effective legal framework and enforcement measures. Numerous attempts over the last two decades to put such a mechanism in place have failed. In the short to medium term, the ambitions for transforming the tax regime through the digitization of analog practices might prove overly optimistic.
A richer vein to exploit is the removal of general sales tax exemptions, which, combined with higher income taxes, directly impact middle- and lower- income households. The avalanche of taxes, utility tariff increases, and rampant inflation have squeezed middle and salaried class incomes to the point where many find it impossible to make ends meet. As disposable incomes shrink, they are forced to curtail purchasing goods and services, dampening demand and discouraging businesses from expanding and investing. Anecdotal evidence suggests that harsh conditions are forcing middle-class families to curb investment in education and health care, leading to a less healthy and poorly skilled workforce. This, in turn, diminishes growth in productivity and innovation, which are critical for economic prosperity.
Squeezing the middle class will have implications for the long-term capacity of the economy to generate resources to start businesses, improve productivity, and foster entrepreneurship and innovation. It is likely to discourage the development of a more dynamic and diversified economy that would broaden the tax base. The goal should be to expand the tax base and establish a fair tax structure, providing the government with more resources to create a virtuous investment cycle in infrastructure, education, and social services, propelling further economic growth.
In 1789, in the face of an economic crisis, the Estates-General, the representative assembly for the three Estates, dominated by the clergy and nobility, met to impose further taxes on the common people and block any reforms proposed by them. Locked out of the meeting hall, the Third Estate representatives convened on a tennis court and swore the Tennis Court Oath, vowing not to disband until they had drafted a new constitution for France. Thus, the frustration and sense of injustice among ‘commoners’ sparked the beginning of a revolutionary movement that would fundamentally transform French society and government.
The fast-growing but increasingly impoverished lower and middle classes of Pakistan feel locked out of the power structures making resource extraction and distribution decisions. The feelings of injustice and deprivation are palpable. Whether this will be resolved through violence or institutional reform remains to be seen.
– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.
