Pakistan: Tax system needs beefing up

The scale of the catastrophe in Pakistan has revealed massive shortcomings in that country's capacity to respond to emergencies. A significant part of the problem lies with Pakistan's woefully inadequate national tax system. But contrary to comments by UK Development Minister Andrew Mitchell on BBC's Today programme this morning, introducing VAT is not the answer: priority needs to be given to tackling endemic tax evasion, unnecessary tax exemptions, and the complete absence of a tax on land values.

Responding to the interviewer's question about concerns that Pakistan's rich elite pay little or no tax at all, undermining the country's public finances and exacerbating the appalling inequality between Islamabad's elites and the vast majority of the population, Mr Mitchell agreed that "in the medium term Pakistan needs to address this fact, there is no VAT for example, the taxation system needs to be beefed up."

The case for beefing up the tax system is unarguable: the administrative weaknesses of the current system are a national disgrace (and as you can read here, we are not the only people to have noted this). But to impose a Value Added Tax on an already highly impoverished society is not the answer, especially since this is more likely to worsen an already untenable situation as legions of micro-businesses react to the new tax by shifting to the informal sector. The correct response is to strengthen direct taxation, especially on the wealthy land-owning elites who dominate Pakistan's quasi-feudal society. Introducing land value taxation and strengthening tax compliance among rich people and companies should be the medium term priorities.