In yet another IMF handout to the Pakistani Government, it is being asked to quickly raise 40 billion Pak rupees in additional revenues, before the release of the next IMF tranche. Well, vagaries of being on a debt ventilator, since we know that if IMF pulls the plug the country could very well be staring at an imminent financial default – so much for the performance of this government in the last 2 ½ years!

Naturally, Mr. Dar being the loyal subject, like the IMF he also is not happy with tax collections in the country and as a result fresh hysteria is being kicked-up on the clichéd low tax to GDP ratio, FBR (Federal Bureau of Revenue) has just been turned upside down to appoint new and supposedly more eager hawks to prey on already dwindling legitimate businesses and industry, and all sorts of new levies are being contemplated in haste, without bothering to even think through any larger or longer term impacts on the economy, investment and job creation - So much also for the budget 2015-16!

Forget about logical and prudent thinking or subsequent hard work on necessary tax reforms to ensure meaningful tax (collection) drives instead of the ones promoting mere witch-hunting cum corruption or sending clear signals on facilitating the documented businesses over the undocumented ones or using modern day behavioral economics tools to romanticize tax initiatives, the mindset instead appears more draconian than ever before: Use arbitrary cum coercive methods, mop up revenues with total disregard to rightful payables/refunds of the private sector and completely erode the concepts of privacy and self-respect of the tax payers. It is rather sad and quite ironic that those who choose to invest and operate legitimately in Pakistan are treated like thieves while the ones who remain unregistered or prefer to move their operations off-shore can get to be in leadership positions; sermonizing the nation on ethics and national duties. Anyway, enough of moaning and back to the reality of a looming additional tax burden on a handful of tax payers, and of course the accompanying harassment to go along with it. Given that cost of doing business in Pakistan has risen dramatically in this government’s tenure – increased tariff rates in all utilities; record raise in various kinds of taxes; double taxation at federal and provincial levels; and an unbridled bureaucratic oversight menace – rendering Pakistani industry uncompetitive both globally and regionally, unemployment in the economy has increased manifolds and investment stands at an all time low. The policymakers therefore will be well advised to refrain from indulging in any further coercive tax misadventures through their new look FBR team, since doing so will only be counterproductive.

Under the present circumstances, perhaps a better approach to raise revenues would be through a wider, albeit a lower percentage, of consumption tax or a financial transaction tax. For example, according to a resource study from FICCI (Federation of Indian Chambers of Commerce & Industry), a financial transaction tax: a small excise tax (typically a few hundredths of a percent) on trades of stocks, bonds, derivates and other securities of one-basis point (0.01 percent) can raise enough money over 10 years in India to finance its new pre-kindergarten program for 3 and 4 year-olds and provide basic funding of college assistance for nearly all low-income student applicants.

What’s more, a financial transaction tax would also significantly reduce the undesirable levels of high-frequency trading in the Indian financial markets. This trading, most of it is automated in India, is used to make windfall profits through arbitrage (taking advantage of small difference in price) in milliseconds. It does nothing to help ordinary investors and can destabilize financial markets. And in the U.S., for example, a one-basis-point tax on $1,000 worth of stock would cost the stock trader only a dime (10 cents), but the sheer volume of trade itself in U.S. stocks carries a potential to raise up to $20 billion for its treasury. We also need to think on such lines where the levy tends to be insignificant but the impact huge.

One concern is that if we tax trades, we will get fewer trades, and less liquidity. History suggests that trading volume would in fact decline somewhat as transactions became more expensive. But is this a bad thing? Liquidity is critical in financial markets, both for efficient “price discovery” – quickly discerning the market value of assets – and for the basic market operation of matching buyers and sellers. If a market gets too “thin”, say because increased transaction costs lead to a decline in trading volumes, price discovery gets harder. However, there is a thing called as “front running” when high frequency traders dominate the genuine investors – a phenomenon currently prevailing in Pakistani financial market place. With a fair transaction tax in place, it will check front running. Transaction taxes of one type or another have long been in place in countries with thriving financial markets, including Britain, Hong Kong, Singapore and many others, and are invariably used from time to time as a tool to raise extra revenue without much fuss, and with only a ‘slight’ adjustment.

Last but not least, a financial transaction tax by its very nature is highly progressive, another plus point given our issues on high and growing inequality. According to the Tax Policy Center of the USA, 75 percent of the liability from the tax gets to fall on the top fifth of taxpayers, and 40 percent on the top 1 percent. The tax also falls more on high-volume traders than on the long-term investors, as already mentioned above. To sum it up, a financial transaction tax or an adjustment in it is a smart and fair way to raise urgently needed revenues while reducing unnecessary trading that makes our markets more volatile. Its usage as a tool to raise additional revenues is worth a look in our case as well.