The claim:
“We cannot expect the people in the UK to pay taxes to improve education and health in Pakistan if the Pakistan elite is not paying income tax.”
– International Development Committee, report on Pakistan, 4 April 2013
The background
Over at the House of Commons, MPs have been getting nervous about Pakistan.
Why, MPs on the International Development Committee have asked, should British taxpayers be footing the biggest bills in Pakistan when Pakistan’s taxpayers don’t want to?
The matter is one of urgency, they say, because the country is about to become the largest recipient of UK bilateral aid. Aid to Pakistan, they noted, was about to double, from £267m in 2012-13, to £446m in 2014-15
FactCheck was intrigued – is Pakistan really that bad?
The analysis
By a number of accounts, Pakistan’s tax collection rates aren’t that strong. More than 70 per cent of Pakistan’s MPs, including many ministers, do not pay tax, according to the report.
The report said that for the last decade, tax revenue as a proportion of GDP has remained at around 10 per cent.
We looked at the World Bank to see what they said tax revenue had been as a percentage of GDP.
In 2008, tax revenue was 9.9 per cent of GDP; in 2009 it was 9.3 per cent; in 2010, 10 per cent, and in 2011, 9.3 per cent – so the committee is right.
What was less clear, however, is why Pakistan should be singled out.
The MPs correctly said that the country was about to become the biggest recipient of DFID aid.
Before then it had been India. Like Pakistan, it’s classed by the World Bank as a lower middle income economy, and would be an obvious comparison. In 2011/12, excluding humanitarian aid, India received £284m.
When we look at their tax collection rates, it would appear that they were no better at it than Pakistan. In 2008, tax revenue made up 10.7 per cent of GDP. In 2009, it was 9.8 per cent, and in 2010, it was 9.7 per cent.
The next biggest recipient of UK development aid has been Ethiopia. According to DFID, in 2009/10, it receivd £151m; it got £245m in 2010/11, and £268m in 2011/12.
According to the World Bank, as a proportion of GDP, their tax collection rates were: 2008 – 7.4 per cent; 2009 – 6.6 per cent; 2010 – 9.8 per cent.
And after Ethiopia, came Bangladesh for largest aid recipients, both of which are low income economies. Between 2009/10 to 2011/12, Bangladesh has received £538m. The World Bank said that in 2008, money collected from taxes made up 8.8 per cent, and in 2009, it was 8.6 per cent.
It’s not that surprising; Pakistan, India and Bangladesh are known as being countries in which wealthy elites have vast control not only over political power, but also the political economy. As Dr Jonathan Di John, a senior lecturer in political economy at SOAS, University of London, said: “In South Asian countries there is a high level of capture elites have over the states. Also, there is a tolverance of tax evasion in high wealth groups in these countries.”
When it comes to collecting taxes, neither has the UK always been the most helpful.
Indeed, another report by the same committee last August suggested that the UK was proposing measures which would give greater incentive to multinational companies to shift profits from developing countries to tax havens.
That was through changes to the 2012 Finance Bill. Previously, a UK-owned corporation making profits in countries with lower corporate tax rates could see the UK government impose an extra tax charge on them to make up the difference. It was a disincentive to shifting profits to tax havens from developing countries.
But under the changes, the UK government would only be obliged to impose the levy if the money was shifted from the UK to a tax haven. In other words, there was nothing to stop UK-owned companies from shifting their profits from developing countries to tax havens.
It’s fair to say that profits from multinational companies are not going to make up the bulk of tax revenues for Pakistan and other countries. But it does seem odd that while criticising Pakistan for its tax collection, the UK government should implement measures which are likely “to have a significant detrimental impact on the tax revenues of developing countries”, according to the MPs report of last year.
Likewise, the committee made a recommendation that the UK government introduces legislation to require tax authorities to exchange information relating to UK citizens or companies.
In reply, the government said: “Disagree. The government is fully committed to tackling tax evasion and see transparency and information as key tools but does not regard the introduction of [such measures] as an appropriate means to achieve this … The UK approach is to work in partnership with other governments, including those in developing countries, to increase tax transparency and exchange of information.”
So while berating Pakistan for its inability to collect taxes, the UK government has also resisted means which would make it easier for developing countries to hold foreign multinationals to account in fiscal matters.
The verdict
Pakistan’s tax collection rates have been low, and FactCheck doesn’t dispute that.
But so have those of the three other largest recipients of DFID aid in recent years – India, Ethiopia and Bangladesh.
The question is – why Pakistan, and why now?
Both Bangladesh and Ethiopia are low income countries, with less capacity to organise and mange tax collection. Pakistan is however a middle income economy, and within its peer group tax take averages around 15%’ this coupled with Pakistan’s excessively large defence budget means the country is nearly always on the verge of debt default, and is regularly bailed out by the IMF. As a result both Pakistan’s economic and political stability is impacted by an inability to pay for its government, in addition to failing to address widespread poverty.
India’s economy is more dynamic and it is not in a permanent state of macro-economic crisis. Also UK aid to India is declining, I’m sure the issue would have been raised if the intent had been to increase aid to India.
I can’t help feeling that all of us would be less poor because of the UK Government’s austerity measures if we collected a fair proportion of tax from the rich here. Let’s not knock other countries until we’ve got our own house in order.
” are we right to pull up Pakistan over taxes?”
Yes.
Moreover, Pakistan migrants to the UK who take their wealth (where generated in the UK) back tp Pakistan, should pay taxes on those too – but only where UK taxes have NOT already been paid.
No reason what UK taxpayers should indirectly fund the wealthy of any country (developing or not). For me, the idea of aid is to help a country get itself into a sustainable state where it no longer requires aid. Governments have obligations to their people and where money comes in from aid this should not be (indirectly) used to allow the wealthy of that country avoid taxes (because the government has enough money from aid to do the minimum for its people).
It is reasonable to expect any country to do the best it can for itself. That will not always be enough to allow it to develop in which case, aid is appropriate. But where it does not make any/much effort to stand on its own two feet then no reason we should subsidise it.
Aid should help a country develop and not be taken as an ongoing subsidy (which seems to be the case with some countries e.g. where they don’t make much effort to even tax their own wealthy).
This surely though questions why we should be giving ANY aid to countries like these in which anything given will end up in the pockets of these elites. Or am I missing the point? Cameron has promised to give so much of our GDP to these places, but who benefits?
I’m not a hundred percent clear on this but I’m pretty sure that these figures only give federal level tax collection. And in India sub-national states collect a larger share of taxes than do Pakistan’s provinces. So I think if both national and subnational level taxes are taken into account, Pakistan does much worse than India. Not sure about Ethiopia. If anyone has updated information it would be greatly appreciated.