Donors want Pakistan to tax rich to pay for floods

Pakistan's plea for billions of dollars to recover from this summer's floods has sparked pressure on the country to reform a tax system that collects very little money, even from the rich.

The country's biggest donor, the United States, has issued one of the strongest warnings, saying the world will only be able to fund a quarter of the tens of billions of dollars it will take to rebuild — and it will be difficult to get American taxpayers to help if Pakistanis aren't footing their share of the bill.

But many economists fear the threats are hollow and the US and others will once again bail out Pakistan without insisting on necessary economic reforms because the nuclear-armed country is so important in the war against al-Qaida and the Taliban.

"Pakistan can say, 'If you don't help us, the economy crumbles, the Taliban takes over and there goes your war on terror,'" said Akbar Zaidi, an economist who recently published a report on Pakistan's tax system for the Carnegie Endowment for International Peace. "They don't want to alienate the government, so they will let them off the hook."

Despite years of international pressure, Pakistan has one of the lowest effective tax rates in the world, equal to about 9 percent of the value of the country's economy, according to the Carnegie report. In contrast, the US equivalent is more than three times as high at about 28 percent.

One of the reasons Pakistan's rate is so low is because many people avoid paying taxes. Fewer than 2 percent of the country's 175 million citizens pay any income tax, according to the report.

Also, some sectors of the economy like agriculture — a major money maker for the elite — are totally exempt from tax, and the rich have pushed to keep it that way.

"A small elite comprised of the military, land owners, and the rising urban upper and middle classes, is loath to give up any of its wealth (some of which is illegally accumulated)," said the report.

Ishrat Hussain, former head of the Pakistan central bank, estimated that better enforcement of current tax policies and the elimination of key exemptions should produce an effective tax rate of 15 percent — generating nearly $10 billion in additional revenue per year.

That money would go a long way toward repairing devastation from the floods, which affected more than 18 million people and damaged and destroyed over 1.8 million homes. It would also provide the money necessary to begin fixing Pakistan's crumbling school system and health infrastructure.