More than 700 years ago Ibn-e-Batuta in his memoirs wrote: “I found affluence in countries and societies where state taxation was low and, ironically, misery and poverty where state taxation in the name of the people was high” (Rihlah).

We as a nation seem to have an obsession with the notion of the presence of a large black economy (why the word ‘black’ I don’t know, as more appropriate words should be ‘hidden’, or ‘alternate’, or ‘un-accounted for’, or ‘parallel’) in Pakistan, which is touted as the major hindrance for our country towards reaching its real economic potential.

The argument being that since a big chunk of economic activity (some ascertain half and half) takes place off the ‘books’, it does not tangibly contribute to the national kitty in the shape of taxes and, hence, deprives the government from the true amount of taxes it should collect in order to comfortably balance its budget and also carry out the essential level of public development works. Successive Finance Ministers, right from Mahboobul Haq to the present one, have harped on this tune of increasing the tax (direct) to GDP ratio without really going into detailed merits and demerits of the argument.

While there is no debating the fact that ideally in a utopian environment all economic activity should be documented and accounted for, but, in reality, there always has to be a compromise between the on-books and off-books trade. Often the economists argue (Adam Smith, the father of economics, included) that economic activity in any form is better than no economic activity at all.

Further, when making a case for and in trying to persuade people to document their businesses, the following factors weigh in heavily:

i    Confidence in the government

    to efficiently, fairly and

    productively use the collected         taxes.

i    Level of different levies and

    taxes, which can determine the         choice between an operation         closing down and operating

    competitively.

i    Incentives and benefits attached         to conducting a registered

    business.

i    Prevalent level of bureaucratic         corruption.

i    Perceived economic outlook.

i    Available legislative cover for         default and exit.

i    Market dynamics (competitors’         behaviour).

i    Fairness of tax structures across         different sectors.

i    The profession simply cannot         be pursued in a documented form.

A recent study conducted by Dr Venkatesh of the University of Chicago aims at changing the way public and policymakers think about black market. On an individual level, the underground economy includes a vast array of people providing services that are off the books, but not necessarily illegal.

He enumerates this lot who, in his opinion, are having a far harder time in the face of recession: office cleaners, squeegee men, informal security guards, “canners” who scavenge for recyclables (when there is less consumption, there is less to recycle), domestic help whose employers have been laid off and disguised unemployed (mainly in the agricultural sector in developing economies such as Pakistan).

Also, the underground workers or workers yet factually unemployed, face certain problems unique to their status, since they have no kind of employment or unemployment securities.

As for the unregistered businesses, Venkatesh argues that black market businesses resemble the wider society in which they are enmeshed. He strongly supports the “culture of employment” theory, which suggests that “people everywhere want to work; they want to do so industriously, even when they are breaking the law”; and the key is to provide them with as many employment opportunities as possible, even if it means the government being deprived of its due share of tangible tax collection in the near-term.

He finally states that if we think the economic meltdown is hitting bankers and realtors hard, spare a thought for the members of underground economy. In any country that believes its underground economy contributes significantly to its employment base needs to support it in this time of recession, instead of coming hard on it. This, to essentially avoid the compounding of social problems arising from shrinking economies and growing unemployment.

‘Tax misery’ has become the latest economic term, which basically refers to the misery suffered by people on account of sum total of all taxes applicable in any given economy. The higher the sum total of payable taxes, the greater the misery.

In the ‘Tax Misery Index’ tabulated by Jack Anderson of Forbes, Pakistan’s total tax burden can be worked to being as high as 77 percent and this high figure, in reality, still tends to be understated as revenue generated from indirect taxes (in Pakistan, proceeds from indirect taxes now exceed the ones collected through direct taxes) bears a separate “burden coefficient” in the tabulation chart.

Thus, further strengthening the argument that in a country like Pakistan where the average person is already quite heavily burdened by indirect taxation, it is not enhancement of taxation that the government should seek, but instead it should meaningfully harness the potential of economic activity in the country. That, in turn, will serve as an auto-mechanism for higher revenue generation through the existing (or even reduced) tax-basket.

Any sensible and prudent government should know that in the present circumstances where the global economy, and especially Asia, is now entering another recessionary cycle, an approach that aims at increasing ‘tax misery’ at home - meaning pursuing the typical Keynesian fiscal policy of more government “tax-and-spend” - will invariably lead to stagflation and, therefore, should not be an option!

The writer is an entrepreneur and economic analyst.