The prohibited zone: why Pakistan’s tax policy cannibalising growth

“A state which dwarfs its men, in order that they may be more docile instruments in its hands even for beneficial purposes—will find that with small men no great thing can really be accomplished.” — John Stuart Mill

Pakistan is currently a state suffering from a profound identity crisis. We have attempted to graft the tax burden of a sophisticated European social democracy onto a population that receives the public services of a medieval fiefdom.

We are not a welfare state; we lack the institutional nervous system, the documentation, and the moral contract to sustain one. Yet, our fiscal policy remains obsessed with squeezing the productive few to fund a bloated, unproductive bureaucracy. By early 2026, this taxation under the disguise of collecting revenue has strangled a resilient, hardworking population under the weight of a welfare-level tax regime without a single welfare benefit in return.

With only 3.4 million effective taxpayers, a mere 4% of the 85.6 million-strong workforce funding the entire state, we have declared war on the middle class. Having forced this captive minority to bridge a multi-trillion rupee deficit while the informal elite remain untouched, we have classified excellence as a taxable offence and transparency as a path to insolvency.

If we seek a roadmap of where this ideological confusion leads, we must look at the state of the United Kingdom. Once the engine of global industry, the UK enters 2026 as a cautionary tale of high tax and low growth, pushing its tax-to-GDP ratio to a record 38%, and through that signing its own economic death warrant.

This fiscal squeeze has birthed a productivity paradox where, despite record-breaking levies, British productivity has stagnated. The reward for risk vanishes the moment the state signals it will seize nearly half of every incremental pound earned. As a result of this model, 2025 saw a record-breaking 9,500 millionaires flee the UK, the highest migration of wealth in British history, as entrepreneurs pivoted to more hospitable climates like the UAE.

UK business investment now languishes as the lowest in the G7. It did not take much time for many to realize, that regardless of London having a reputation for the global elite to spend their summer or keep apartments in, if taxes are going to target in that manner it is much favourable to just leave. If a G7 economy with centuries of institutional depth is buckling under this weight, Pakistan’s attempt to mimic this model without the underlying infrastructure is not just misguided, but suicidal to say the very least.

According to 2025 Islamabad Policy Research Institute data, the state has crossed the fiscal Rubicon into that dangerous territory of the Laffer curve where higher rates shrink total revenue by incentivizing mass evasion and informality.

When a salaried professional is taxed at 35% but must still pay out-of-pocket for private security, power, and education, the government is effectively charging a luxury premium for a social contract it has already breached. The outcome of that is already seen in the form of 800,000 skilled architects of our future economy leaving Pakistan by 2025 who had no choice but to either be crushed under our current policies or go into exile.

The prevailing counter-argument, often echoed by the IMF and state technocrats, is that the fiscal deficit leaves us no choice. They argue that with debt-servicing requirements nearing Rs9 trillion, the state must extract every possible rupee from the documented sector.

This logic is fundamentally flawed. You do not foster a forest by chopping the only trees that manage to grow. High rates on a microscopic base are the cause of our stagnation, not the cure. By maintaining such high rates, the state ensures the “shadow economy” remains in the shadows. True fiscal solvency is a product of volume and trust, not the velocity of extraction.

To break this debilitating cycle, Pakistan must decisively abandon this welfare mirage presented to us, and pivot toward an incentive driven growth model that transforms the country into a high-performance economic tiger. Let us reclaim the promise of a nation that once stood proud as the economic tiger of the east.

This begins with a radical flat-tax revolution, slashing both corporate and individual income taxes to a competitive 20% cap. It would move the state out of the fiscal prohibited zone and signal not only to global markets that Pakistan is a sanctuary for ambition, but to our youth that they too can grow and build in their own country. Crucially, this must be paired with uncompromising productivity accountability through a mandatory public value audit, establishing a firm “no service, no tax” principle where a state that spends Rs. 9.3 trillion, must justify to a greater standard before demanding more. By abandoning the predatory tax to spend mentality in favour of an invest-to-grow philosophy, the government can finally stop subsidizing a bloated bureaucracy and start rewarding the true builders of the nation through massive credits for job creation and technology exports.

Pakistan’s greatest natural resource is not its minerals or its geography. It is the sheer, unyielding eagerness of its people to work and prosper. For how long will we place a concrete ceiling of taxation over their heads? We must choose our path.

Do we remain a high-tax, low-growth museum of failed European ideas, or do we become a lean, high-incentive tiger of the Global South? If anything, we owe it to our youth to not place these shackles on their feet that stop them from growing. Iqbal once lamented the same thing:

Shikayat Hai Mujhay Ya Rab, Un Khuda wandan-e-Maktab Se

Sabaq Shaheen Bachon Ko De Rahay Hain Khaak—Bazi Ka”

(I have a complaint, O Lord, against the masters of the academy; they are teaching the young falcons to play in the dust.)

The path to a USD 500 billion economy is not written in the fine print of an IMF agreement. It is found in the freedom of the Pakistani citizen to earn, keep, and build.

Copyright Business Recorder, 2026