Every
government is tasked with the important duties of accelerating economic growth,
social development, redistribution of the benefits of economic growth, removal
of income inequalities and allocation of resources.
To
deliver these services and to finance day-to-day activities, the government
needs an income. Some of the most important sources of government income are
derived from taxation, administrative incomes, incomes from public property and
increases in national debt.
Taxation
is a pillar of every country’s economy, and its collection is one of the major
issues in economic development. The resources available to a country are
limited, so if the government wants to increase expenditures, it has to come
from a reduction in private spending. This is done through a transfer of
resources from the private sector to the public sector, with taxes being the
main tool in doing so.
The
capacity of an economy to grow depends upon the government’s ability to tax.
The better the taxation system, the more help a country has in attaining
sustainable growth and macroeconomic stability.
From
the tax money, the government provides services like education, healthcare
systems, pensions for the elderly, unemployment benefits, public
transportation, energy, water and waste management systems, etc. A portion of
taxes also goes in paying off state debts and interest accrued on them.
Tax
policies differ in developed and developing countries. An example of modern
taxes is the wealth tax, which is generally employed to target the richer
populace which owns expensive assets and properties and has the capacity to pay
for them. This is a kind of direct tax. A direct tax is considered an effective
tool in helping economic benefits trickle down to the poor, while discouraging
the concentration of wealth in a few hands.
The
wealth tax improves the fairness of most tax systems, as it effectively raises
government revenue, improves economic growth and reduces income inequality. It
has been observed that a wealth tax that decreases other tax burdens – such as
income, capital gains, sales, value added and inheritance – increases the time
horizon for investment and can increase the return on investments over time.
Greater
economic equality has also been correlated with higher levels of innovation.
Increased government revenue from a wealth tax can be pumped into the promotion
of public investment in education, health, housing services, research and
development, and transportation infrastructure, which leads the economy to a
path of efficiency and equity.
However,
there are some inherent flaws in the wealth tax regime. There is an attendant
possibility of capital flight, brain drain, loss of jobs, and ultimately a net
loss in tax revenue.
Furthermore,
the valuation of illiquid assets – e.g. real estate, privately owned
businesses, antiques, art etc – can be purely arbitrary. Due to money supply
fluctuations, there are dynamic changes in wealth valuation over time. This
creates a moral hazard, whereby governments can use inflation as a direct means
of raising revenue.
Due
to valuation and accounting difficulties, wealth tax systems also have
relatively high management costs for both the taxpayer and the administrating
authorities. Thus, imposition of a wealth tax would result in flight of capital
and people would start transferring money abroad. It would be a kind of double
taxation, wherein a person paying income tax on an asset has again been forced
to pay the wealth tax.
Nonetheless,
it is a matter of great concern for Pakistan that the share of direct taxes in
its revenue system has been substantially lower than that of indirect taxes.
The share of personal taxes to overall direct taxes is also very low and has
remained constant. This has serious implications for the economy.
Our
tax system is more a system of tax exemption than the system of tax collection.
The legal boundaries of the wealth tax and the political economy of such a tax
are quite perplexing, but if, as a system, it is scanned thoroughly and
practically instead of theoretically, it can have significant positive outcomes
for the economy in general.
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