Pakistan does not have a working tax system and many high income earners pay no tax, according to an article in the New York Times.
Much of Pakistan’s capital city looks like a rich Los Angeles suburb. Shiny sport utility vehicles purr down gated driveways. Elegant multistory homes are tended by servants. Laundry is never hung out to dry.
But behind the opulence lurks a troubling fact. Very few of these households pay income tax. That is mostly because the politicians who make the rules are also the country’s richest citizens, and are skilled at finding ways to exempt themselves.
Similar, though less extreme, statements could be made about Italy, Greece, Spain and Portugal. Possibly one of the strongest indicators or an economically broken state is an ineffective tax system.
In Australia in the 70s it was said that paying tax was becoming voluntary. The Bottom of the Harbour and other schemes were marketed as easy ways to avoid tax. Legislation and prosecutions got rid of most of these devices and I think that the rate of tax compliance is pretty high.
I guess there must have been some economic research on the effects of lack of tax compliance on a state, though I can’t find it.
Speer yanked everyone working on tax compliance in about ’43 or ’44 to put them in armaments factories etc. Germans kept paying their taxes anyway.
Tillman
19 Jul 10 at 4:20 pm
ken
I don’t quite buy the broken state theory only in so far that the state apparatus is broken. However the people may be doing fine in the grey labor market.
If the Pakistani capital looks like a rich LA burb, there’s little avoiding the fact that what it is.
the NY times piece is pretty self-serving.
Put it this way dumping money in the US federal hell hole would be a lot less efficient than not paying into the Pakistani one.
JC
19 Jul 10 at 4:23 pm
Anyways, done right no one who is self employed at least and most high income earners should be paying more than 15% in federal taxes in the US.
In fact you wouldn’t get to heaven if you paid more as it would be considered a deadly sin… the 8th deadly sin.
JC
19 Jul 10 at 4:25 pm
That’s a point of view JC. And one I have some sympathy with. “If I give them money they’ll only waste it”.
But I can’t find an example of a country with low tax compliance that looks like a well governed state.
And maybe (just maybe) if the tax burden falls on everyone, the pressure to limit government waste might increase?
Ken Nielsen
19 Jul 10 at 5:34 pm
Ken
It is a fascinating question. I know there is some work, more in political science and sociology, that was inspired by Schumpeter. It looks at the effects of the tax system on the character of the state.
Essentially the question is whether a state that is dependent on taxing its own citizens for its revenue is more accountable than one that is insulated from its own citizens by other sources of finance.
This article is representative:
http://www2.ids.ac.uk/gdr/cfs/pdfs/Moore%20International%20political%20science%20review%20article%202004.pdf
Taylor
19 Jul 10 at 5:46 pm
So which comes first: a lack of tax compliance or a dysfunctional state?
Entropy
19 Jul 10 at 8:08 pm
Good question Ent. Dunno the answer.
Ken Nielsen
19 Jul 10 at 8:36 pm
‘Put it this way dumping money in the US federal hell hole would be a lot less efficient than not paying into the Pakistani one.”
Yeah right.
A non-tax-paying wealthy Pakistani has a much lower standard of living than the taxpaying US counterpart in large part because the Pakistani doesn’t get the benefits of a proper tax base – i.e. an educated society with proper security, good roads, good public transport, public hygiene, water from the tap that you can actually drink, reliable electricity, no suicide bombings, well defended borders, freedom from all the petty harassments of corruption etc.
I’d far rather pay tax and live in Australia than be tax free in Pakistan. Not even close.
Tillman
20 Jul 10 at 11:24 am
So which comes first: a lack of tax compliance or a dysfunctional state?
I’d say their siblings rather than parent and child.
dover_beach
20 Jul 10 at 11:36 am
Yes, they go together but the causation isn’t clear. You suspect that legitimacy of the state is prerequisite for tax compliance by its citizens. However if the state never has to resort to taxation, it doesn’t face demands for legitimacy. No taxation, no representation.
What starts off the virtual circle of legitimacy and compliance? A war with another country helps apparently. External war has been a prerequisite for levying income tax in many countries. Then larger investments in tax administration and legal systems allow the development of more infrastructure and sophisticated markets. This paper from Tim Besley published in the American Economic Review last year is interesting:
http://econ.lse.ac.uk/staff/tbesley/papers/originsofstatecapacity.pdf
Incidentally, this suggests why sponsoring an insurgency (Iran in Iraq, Pakistan in Afghanistan) is more efficient to undermine your enemies than war. War creates the risk of uniting forces in weak states, and increasing the state’s capacity. Fostering insurgency is cheaper and fragments the opposition.
Taylor
20 Jul 10 at 5:43 pm
Actually, the above also suggests why if the Afghanistan surge is not successful, withdrawing from the south of the country might be a good option, as argued recently.
It allows the Afghans to consolidate their resources and develop security in a smaller, more manageable area. Once the state is powerful and unified enough to defend itself in the north, it can consider retaking the south.
The Pakistanis are sponsoring the insurgency in the south, so, if necessary, let them have it for the time being. Partitioning Afghanistan frustrates their objectives by consolidating to a position of strength, rather than trying to maintain an indefensible territory and achieving only permanent instability.
http://www.politico.com/news/stories/0710/39432.html
Taylor
20 Jul 10 at 8:55 pm