Taxes: who actually pays

09 Feb, 2019

Let's kill the suspense immediately. Essentially, as evidenced from IMF's intervention in every country they have historically "assisted", even they, the IMF, believe that higher taxes on higher income groups is harmful for growth and hence have supported consumption taxes on the masses. The debate over progressive taxes is exactly that, just a debate; practise suggests that the economic community is united in the view that everyone should pay taxes, from the poorest up to the middle class, which is why they invented the theory of the sales tax or VAT. In fact if you are a non-filer because of any valid reason, including having an income which is below the taxability threshold, it is all the better for the State; pay more income taxes!
Every which way you might want to look at the equation, the conclusion is the same; every economic decision by the State, it seems, will result in the common man ending up paying more taxes since the proportion of indirect taxes in total tax collection is always higher than direct taxes all across the world. In fact in the case of developing countries most all taxes are indirect. The rich have enslaved the theory and practise of collecting taxes completely.
Consider the increase in interest rates by the Central Bank in just one year by almost 4.75%. Whether or not it keeps inflation in control, one thing is for sure, those who have money in the bank are earning more interest. And guess who pays for their gains? Those who don't have money in the bank!
Increase in interest rates obviously increases the debt servicing costs of the country's biggest borrower, the Government. Already facing a high fiscal deficit, the government accordingly has to collect more taxes to try to simply maintain the fiscal deficit at current high levels, and since almost 80% of tax collection is through indirect taxes, everyone pays. Only to identify that there are multiple ways that everyone ends up paying, even if the government chooses not to increase taxes; such an increase in interest rates on government domestic debt, effectively wipes out the Federal Government Spending on education and a whole lot more welfare activities.
The government recently announced lower taxes on banks on that income which arises from lending to small and medium enterprises, and some other sectors; which decision solidly appears to be a step in the right direction. However, even if the banks do choose to avail this facility and actually reduce interest rates on lending to SME, all of which is iffy, this would mean a dent in the government's tax collection. Accordingly, everyone, including the SMEs, will end up paying for this reduction in interest cost of SMEs. Funny, isn't it?!
The government wants to, in fact has always strived to, attract FDI, to temporarily manage the current account deficit, and therefore it sounds logical for it to offer tax exemptions to foreign investors or guarantee exorbitant returns on their investment. But when the government actually ends up paying those guaranteed returns, where exactly do you think it pays from? The taxes they collect from all of us, since recall that the Government's preferred option for collecting taxes is through indirect taxation. Finally when the foreign investor thereafter repatriates his profits, the current account deficit increases once again and the country needs more FDI; definitely a foreign currency-denominated circular debt which we all have to keep paying forever!
Even if the Government gives a subsidy on electricity, who exactly is paying for that subsidy; everyone! To explain to the layman, even when the government simply prints more money to pay for any subsidy, the populace ends up paying for it in the form of inflation. Inflation is a silent tax. How, is a longer topic and parked for explanation in a later article some day.
Notwithstanding the belief, myth or reality, that lower taxes on corporations facilitate investment and growth, even if the government was to increase taxes on businesses, they, the companies or businesses, actually don't pay such taxes. Everyone else pays; consumers through higher prices or employees through lower wages. Capital will always take its pound of flesh in the form of higher profits. Ever wonder why growth in capital has always been more than the growth in economy? Well because whether the economy grows or not, capital will want its profits in real terms. And guess what is invested in the stock market, and remember they also got a tax break? Capital!
Contrarily, do a quick calculation; did minimum wage increase at the same pace as capital grew over the last three decades? Are we even aware whether or not minimum wage is commensurate with labour's efforts in earning company profits? The objective is not to propagate Marxist theories, but simply to highlight that whether taxes go up or down for companies and businesses, all of us, employees, consumers the poor and the middle classes, are the only ones paying taxes, until such time that someone stumbles upon a brilliant idea to tax capital!
Hopefully, everyone now knows, political rhetoric aside, who actually pays all taxes; us!
(The writer is a chartered accountant based in Islamabad. Email: syed.bakhtiyarkazmi@gmail.com)

Read Comments