The political-economy of tax reforms in Pakistan

Abstract

Should tax reforms be guided by rules of thumb suggested by the IMF, or directions or reform based on analytical approaches, such as optimal tax theory? In many cases, the applications of the directions of reform—which suggest a differentiation of the structure given distributional, incentive and revenue concerns, can be brought close to the IMF prescriptions by a judicious balancing of tax instruments—such as a single or dual rate VAT together with systems of excises.<br /> But in some cases, such as Pakistan, neither prescription has yielded either the revenues anticipated, nor the necessary salutary effect on incentives for production—despite repeated attempts during successive IMF programs over 20 years. The proposition in this paper is that the collusion between vested interests, including the tax administration has led to the difficulties that have also exacerbated the “trust deficit” between the federation and the provinces.<br /> In this paper we examine issues of collusion between the tax administration and vested interests, and also difficulties arising from assigning a very mobile base to a level of government that does not have the technical capability to administer it.<br /> Section I examines method, based on the theory of reform. Section II posits the antecedents of tax reform in Pakistan over the past 50 years. Section III focuses on the design and implementation of the GST. Section IV examines the political economy of provincial revenue assignments; and Section V concludes.