Among the innumerable problems Pakistan's economy faces, the mother of all problems is, undoubtedly, the fiscal deficit. If we continue to spend more than what we earn, it leads to the need for borrowing, which causes the fiscal deficit to bloat further, leading to the current stubbornly high inflation.
Pakistan's capacity to mobilise taxes is greatly under-explored. With a tax-to-GDP ratio of 8.5% along with an undeclared economy almost the size of the official economy, the potential for tax collection is astronomical. With an estimated total economy twice the size of Rs1,000 trillion official economy at a modest tax collection of 16% puts a revenue of Rs 32,000 billion in sight, compared with the paltry Rs 9,400 billion being collected. Why, then, is Pakistan unable to collect the fair share of taxes its economic activity can generate?
Notwithstanding the role of subsidies and elite capture, the single biggest obstacle for our country to raise its earnings is an entity called the "Federal Bureau of Revenue".
With almost 23,000 employees and officers, including a plethora of members, commissioners and collectors along with their deputies and assistants, and a sea of support staff, the FBR intertwines with tax professionals and attorneys on a daily basis to partake in an unprecedented reign of rent-seeking incomparable anywhere else in Pakistan. The bulk of the due taxes are either evaded or go into the pockets of the FBR officials, resulting in dismal tax collection. An even bigger problem is the harassment in the business community that FBR proliferates, which causes an extreme disincentive for most taxpayers to disclose their income (and, hence, create undeclared wealth that is not taxed). This culture of harassment and........