Nadeem-ul-Haque
The objective is not to build a productive tax system but to collect more money, regardless of the economic cost.
Pakistan’s tax policy has become an exercise in extraction rather than statecraft. It is not guided by coherent principles, supported by serious research, or evaluated against the incentives it creates. Each year, revenue targets are simply raised, new withholding taxes are introduced, rates are increased, exemptions are withdrawn, and another layer of complexity is added. The objective is not to build a productive tax system but to collect more money, regardless of the economic cost.
This is closer to the medieval logic of the Sheriff of Nottingham than to the fiscal institutions of a modern state. The Sheriff’s “grabbing hand” sought whatever could be extracted from those who were easiest to reach, paying little attention to whether trade, enterprise, or prosperity survived. Pakistan’s tax administration often follows the same instinct. Formal businesses, documented transactions, imports, salaries and bank accounts are repeatedly targeted because they are visible, while the harder task of expanding markets, improving compliance through trust and simplifying administration is neglected.
Modern tax policy rests on well-established principles.
· Taxes should raise revenue with the least distortion to investment, innovation, and work.
· They should be predictable, transparent, simple to administer, and perceived as fair.
· Above all, they should encourage the growth of the tax base rather than merely squeeze those already inside it.
Pakistan’s system violates nearly every one of these principles. It taxes transactions instead of value creation, documentation instead of informality, compliance instead of evasion, and production instead of productivity.
The result is a shrinking formal economy. Every additional tax on investment, hiring, imports, exports, or financial transactions encourages firms to remain informal, reduce investment, relocate activity, or simply stop growing. The tax base narrows, forcing the government to impose even higher rates and more withholding taxes on the remaining compliant taxpayers. This vicious cycle has repeated itself for decades.
The tragedy is that Pakistan could collect substantially more revenue with a better-designed system. International evidence consistently shows that countries raise more sustainable revenue by broadening tax bases, simplifying tax laws, reducing discretion, strengthening property rights, encouraging formalization and supporting economic growth. Revenue rises because there is more income, more investment, and more profitable firms to tax—not because the state has become better at coercion.
Instead, Pakistan has pursued ever more ambitious revenue targets to finance an ever-expanding state. Government has accumulated ministries, agencies, authorities, subsidies, guarantees, state-owned enterprises, perks, plots and protocols, while expecting the tax system to pay for this expansion regardless of its consequences. Revenue targets have become detached from the economy’s productive capacity. The objective is no longer to tax a growing economy but to extract more from a stagnant one.
This approach ignores a fundamental lesson of state formation. A state’s fiscal reach cannot expand faster than the economy and the institutions that sustain it. In societies marked by weak institutions, regional disparities, informality, contested property rights and limited trust in government, attempts to rapidly increase extraction often weaken both the economy and the legitimacy of the state. A durable tax system grows alongside markets, secure property rights, effective local government, and rising incomes. It cannot simply be legislated into existence through higher rates and more aggressive enforcement.
Pakistan therefore needs a different philosophy of taxation. The first objective should be to enlarge the economy, encourage investment, and make compliance easy rather than punitive. Tax reform should begin with simplification, the elimination of nuisance taxes and withholding regimes, lower transaction costs, transparent administration, market-based valuation systems, and the gradual integration of currently untaxed sectors through institutional reform rather than coercion. As economic activity expands, government revenues will expand with it.
The purpose of taxation is not to feed the beast of government but to finance a capable state that enables prosperity. Pakistan has reversed that relationship. It has allowed the demands of an ever-growing state to determine tax policy, and in doing so has undermined the very economy on which sustainable public finance ultimately depends.
Pakistan’s circumstances make this strategy especially dangerous. A country marked by large regional disparities, widespread informality, weak property rights, uneven public services and persistent political fragmentation cannot build a modern fiscal state simply by imposing ever-higher revenue targets. Fiscal capacity is the outcome of social and political development, not its substitute.
Chasing arbitrary tax targets before building the institutional foundations of trust, legitimacy, and economic opportunity discourages investment, slows growth, and shrinks the formal economy. The resulting stagnation deepens inequality, intensifies regional and social grievances, and further erodes confidence in the state. Instead of strengthening the government’s fiscal capacity, excessive extraction weakens the economy from which that capacity must ultimately be derived, creating a vicious cycle of lower growth, lower legitimacy and an ever more fragile social contract.
