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Monitoring Supply Sided Economics

Complementary to Ronald Reagan’s supply-sided economics of lowering taxes across the board and controlling expenditures, thereby consecutively generating productivity, Thatcherism’s main props are disinvestment and denationalisation of the socialistic public sector. Both philosophies coalesce in the full-fledged exploitation of private sector entrepreneurial expertise by disengaging the State from everyday life of the average citizen. The Sartaj Aziz initiatives inculcates both the capitalistic principles, cutting down of public sector involvement on the one hand and drastic lowering of taxes and duties on the other. His prescription is that reduction of government expenditures and the taking over of the inefficient public sector by the competitive private sector is thus matched by tax reduction incentives to entrepreneurs to lower prices, thus making it more attractive for consumers to spend more. This in turn creates a possible economic cycle of more products and services which not only makes of the resultant shortfall in revenues but also creates more jobs. The sum total of disengagement when multiplied by reduced taxes leads to force-multiplier productivity. This is the logic Finance Minister Sartaj Aziz used to excellent effect with IMF MD Michel Camdessus during his recent visit to the US. In any society where an effective monitoring mechanism exists, this strategy has a good chance of success. In a country where the basic tools of monitoring assessment and collection of revenues are flawed, this route is more than a calculated risk, a gamble that the country may well lose without the safety net of adequate and precisely structured monitoring arrangements. For the record, while seeking the Republican nomination for 1980 US Presidential race, George Bush had attacked then candidate-aspirant Ronald Reagan for espousing “voodoo-economics” as supply-siding was then labelled by him. When George Bush later became Reagan’s VP running mate in his bid for the US Presidency, the Democrats made him virtually eat his words many times over. As US President in his own right in 1988, George Bush faithfully followed the hitherto successful economic prescription of his predecessor till he faltered at the increasing budget deficit and went back on his campaign promise, to quote, “Read my lips, no new taxes!”. Despite the most advanced tax collection machinery in the world, the US economists could not accurately predict that revenues would be far short of projections and expenditures far more than planned, the resultant gap necessitated fresh taxation and destroyed President Bush’s credibility with the US electorate and his bid for a second term. Even the vaunted US Internal Revenue Service (IRS) cannot keep up with human ingenuity for devising circumventions, it has now reverted to putting the onus on the individuals as regards burden of proof with respect to the means to maintain their visible lifestyles.

Mian Nawaz Sharif’s economic Czar, Finance Minister Senator Sartaj Aziz has laid out a comprehensive and far-reaching policy designed to, viz (1) stabilise the economy and to keep it from further erosion (2) solidify the infrastructure so that the economy can take off and (3) make the economy attractive for foreign entrepreneurs to invest in. At the same time he is correcting the various anomalies on an across the board basis. To achieve the desired objectives, we have perhaps one of the worst tax assessment and collection machineries in the world, attempting supply-sided economics in such a scenario is asking for trouble, yet this is exactly what has been done by putting in place very courageous and pragmatic structural changes. Sartaj Aziz’s logic is that unless we go for the root of the trouble, eliminating wasteful and unnecessary expenditure and thus requiring a lower quantum of revenues for non-development expenditure we can never hope to have any long-term solution. There is a famous Chinese saying “may you live in interesting times:”, the very audacity of such an undertaking has been very breathtaking, both in concept and scope. Buffeted by a bleak economic picture on the one hand and a rampant IMF or the other bent upon “punishing” Pakistan for the misdeeds of the Benazir regime, we have embarked on a perilous but brave course that gambles that Pakistanis would respond to liberalisation in taxes by paying their due share to the government exchequer in greater numbers and greater volume. At the same time the government has embarked on a “soft” scheme to enlarge the tax net by requiring everyone who owns a car, uses a telephone, owns a house, etc to file tax returns and obtain a tax default number even if he (or she) is not liable to pay taxes. In an effort to loosen the draconian “corruption” noose around the million or so individuals who do pay taxes and to encourage the business community to pay their dues voluntarily, the government has severely curtailed the powers of the income tax department.

While the government must be congratulated for its courage in attempting what would seem to be an impossible undertaking, the general character of our business community as respects their social and moral responsibilities on a relative basis to those of their counterparts in comparable nations does not inspire the confidence PM Mian Nawaz Sharif and Senator Sartaj Aziz seem to have in them. There is a major force of public opinion that strongly feels that giving such a “freedom” would mean lesser revenues and thus a greater budget deficit. The government seems to have made “believers” out of international finance institutions, particularly the IMF, who have agreed to terminate the condition-ridden and costly Stand-By Arrangement @ 6% interest per annum in exchange for negotiating the soft Extended Structural Adjustment Facility (ESAF) at a more manageable 0.50% interest per annum. IMF Boss Camdessus has been once bitten (or “charmed”) by the Benazir Government’s fake statistics and was expected to be twice shy, it is a feather in the cap of the Nawaz Sharif Government that rather than being publicly skeptical the IMF has tacitly endorsed the Sartaj initiative by refraining from a confrontation stance as proposed by some of their over-enthusiastic punitive-minded staffers. The ESAF arrangement is due to be negotiated in September a few months after the Federal Budget is proposed in the National Assembly and voted for. In the interim the government will manage a bridge financing on their own through the Debt Retirement Scheme and other arrangements. By September, it would be clear whether the reforms proposed are actually being implemented or will remain in the realism of rhetoric. Successive governments, not Benazir’s alone, have had to beat a hasty retreat in the face of wrath from the business community and/or the streets. The economic package has been structured with the active participation of the business community and the rise in agricultural prices is good for our farmers but there is no ready relief for the common man, the poor and the middle class, they will continue to bear the burden they always do.

Without an active monitoring and collection mechanism, the proposed economic package will come to grief. We cannot bank our survival as a viable economic entity on the Pakistan tax-payer’s promises to pay his (or her) dues, there must be a more concrete method to ensure revenue collection. A good but simple analogy is the matter of “run-outs” where the on-field cricket umpires take the help of a third-umpire with the benefit of TV replays. The TV replays keep the umpires on the straight path as to all their judgements, constant wrong decisions could cost them their place on the Umpires Panel. With our tax assessment and collection machinery left in shambles by the previous elected regime and without much credibility, it is necessary to encourage private sector expertise to examine a cross-section of the income and wealth tax cases in each city and comment on the assessment made by the Income Tax authorities. So that there is no discrimination, 20% or so cases in the jurisdiction of each Income Tax Officer (ITO) should be selected by computer-generation and enquired into by qualified and credible investigative companies and verified as to their accuracy. These companies should not be paid any fees but as an incentive given 20% of whatever excess amount they are able to trace out. This bounty would also apply for property that has been under-assessed, with a third entity acting (again very much as TV replay umpires) in case there is protest from the individual as to the veracity of the finding. Just to make sure that the private sector companies do not go berserk, if there is more than 20% difference in the asset value that the third entity evaluates, the penalty imposed on the investigative company should amount to 20% of whatever is the difference. In order to ensure that the private companies do not start blackmailing the individuals or the corporate entity under investigation, the private company should be totally banned from contacting the individual or corporate entity under investigation.

No mechanism is foolproof, the human mind that devises the mechanism can also devise the means to circumvent the mechanism. The basic idea is that there has to be an adequate monitoring mechanism. Flawed or otherwise, it has to be from the private sector. It is also true that the private sector in Pakistan in this discipline may not be fully geared to do the task, at least a start should be made on a test-case basis by computerised balloting to determine the cases to be probed. doom the economics package and our viability as an economic entity. Unless a Sword of Damocles is kept over the heads of the Pakistani tax payer he (or she) is not going to pay his (or her dues) and non-payment would That is the chink in the Sartaj Aziz economic armour, it is imperative that private sector ingenuity is harnessed to overcome it.

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