umair ahmed
MPA (400+ posts)
I received some interesting responses to my previous article titled, Nawazs 3E formula. Dr Abbasi in his letter to the editor defended Nawaz Sharifs 3Es policy of massive tax cuts to big business and the top 10 percent income earners. According to Dr Abbasi, similar tax cuts to big business encouraged higher investment spending and created more jobs in Europe and the US. Hence, Dr Abbasi suggests Nawaz Sharifs 10-percent tax formula will work in Pakistan. I strongly disagree.
The tax cuts implemented by George Bush for big business and wealthy taxpayers led to the worst financial crisis in the US since World War II and caused record unemployment and sharp rise in poverty. Corporate tax rate was slashed from as high as 39.6 percent down to 15 percent and hefty tax breaks were doled out to wealthy individuals. These tax cuts were supposed to encourage higher spending by big banks, oil companies and multinationals for new job creation. Instead, big business and wealthy taxpayers used the money to bet on the stock markets and real estate, leading to a flush of liquidity in speculative investments. Instead of investing in the real economy and creating jobs, the money from the tax cuts created asset bubbles.
When the bubble burst in 2008, the whole world was left reeling. A record number of Americans lost their jobs, and unemployment more than doubled from 4.2 percent in 2001 to over 9.7 percent by 2010. Government debt increased sharply, from $6 trillion (60 percent of GDP) in 2002 to $16 trillion (101.7 percent of GDP) in 2012. Today the global reserve currency status of the mighty dollar, the pillar of US economic strength, is under threat with countries diversifying their reserves away from the dollar and into emerging markets like Brazil, Russia, India and China.
The bipartisan US Congressional Research Office states that the George Bush tax cuts benefitted the richest individuals earning $200,000 or more per year and increased concentration of income at the top. As the tax rate paid by the top 0.1 percent of the population fell, their share of income increased three-fold, from 4.2 percent in 1999 to 12.3 percent by 2008. Hence, all that the George Bush tax cuts achieved was to make the rich even richer, at the expense of all middle- income and poor households.
Pakistan cannot afford such failed experiments. The government is already near default, debt has more than doubled in the last five years and a record number of Pakistanis are unemployed, illiterate and without basic health and clean drinking water facilities. This is because the Pakistani government does not collect enough taxes. At 9.9 percent of GDP, our tax collection is already one of the lowest in the world, even less than in African banana republics. The rich dont pay taxes, and giving them more tax breaks will leave the people worse off.
Nawaz Sharifs 3Es policy of George Bush-style tax cuts to big banks, oil companies, sugar and cement cartels, 5-star hotels, multinationals and top income earners will cause a loss of 1.6 percent of GDP in tax collection. That is double the entire government budget on providing basic health facilities to 180 million Pakistanis. Such a massive tax break to big business will come at high cost to the masses. Lack of resources will mean less money for education, health and clean drinking water facilities for poor households. Who stands to benefit? This money will go straight into the pockets of the big tycoons, wealthy investors and shareholders in the form of record profits. This is not just bad economics, it is broad daylight robbery.
While the PPP tax amnesty scheme offers a one-time reprieve to tax cheats, Nawaz Sharifs ten percent tax formula provides unlimited, unconditional tax breaks to the rich and wealthy. We should all be really concerned that political leaders are advocating highly irresponsible fiscal policies that will further aggravate the rich poor divide in Pakistan. How can Nawaz Sharif justify a policy that effectively takes money away from the poor, only to stuff the pockets of the wealthy elite?
Unfortunately, Nawaz Sharif has made many mistakes in the past. Rewind back to the May 1998 freezing of foreign currency accounts. At that point Pakistani investors had $11 billion as saving in foreign currency (FCY) accounts with local banks, and all of that money disappeared following the freeze. Today the total FCY deposits stand at only $4.5 billion. Even 15 years later, Pakistan has not been able to recover from the damage that Nawaz Sharifs government caused to local investors. The Pakistani rupee has plunged 120 percent since that fateful day in May and this is one of the main reasons why average Pakistanis have suffered from record inflation, unemployment and forced to hold a begging bowl for foreign aid.
Just imagine if we had $11 billions FCY in our banking system today! We would not need to keep running after the IMF and US aid money. The Nawaz Sharif government did realise its folly and within 30 days reversed the decision to freeze foreign-currency accounts. But the damage had already been done. Therefore, instead of copying George Bushs tax cuts, Nawaz Sharif and his team of financial wizards should for once focus on the real problems of the people. Instead of big tax cuts for the rich, Mian Sahib should focus on cutting the taxes paid by the poor.
http://www.thenews.com.pk/Todays-News-9-148406-Bushonomics-in-Pakistan
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