Monday, July 19, 2010

Tax Lesson in Water Pumps

When iconic New York hotelier Leona Helmsley went on trial for tax evasion, she was famously quoted as telling a servant that "only the little people pay taxes."

Nowadays in Pakistan, elites have practically enshrined Helmsley's mantra as the national motto.

Looking for the next big thing in offshore tax havens? Try Karachi or Islamabad. According to yesterday’s New York Times, only two percent of Pakistan’s 170 million citizens pay their income taxes, which supposedly are required of anyone earning over $3,488 per year. That puts Pakistan at second-to-last in the world for tax collection, ahead of only Sierra Leone, which perpetually ranks at the bottom of everything.

Of course, the New York Times being the New York Times, the value of taxation as a mechanism for redistributing wealth takes high priority in the story, but the Times also describes how Pakistani society’s uppermost tiers are crippling the country’s government by not paying taxes on their world-class incomes.

Which would fall on deaf ears among most Americans, except for one big problem: because Pakistan can’t milk their own people for income taxes to fund their country, they’re milking the United States instead. Indeed, US Secretary of State Hillary Clinton is there right now, handing over a purse with billions of our dollars for civil projects like, well, the stuff we pay taxes for here at home.

Inequitable Taxation, at What Price?

Pakistan sits near the top of the list for the international aid Washington doles out annually. In particular, Pakistan has won huge financial windfalls from both Republican and Democratic administrations by virtue of its key role in the war against terror. Pakistan is considered friendly towards the US, so to curry that favor – and perpetuate it – we’ve been pouring our own tax dollars into that country for years.

One of the Pakistani government officials quoted in the Times piece recalls an era when people in that dusty yet surprisingly enterprising country actually did pay their taxes, but guess when that was? Thirty years ago, before the Iran hostage crisis, Beirut, the first Gulf war: basically, before the whole Muslim world literally exploded onto the international stage, and the United States found itself bankrolling global anti-terrorism initiatives.

These days, most of the taxes collected in Pakistan are paid by the country's merchant class (sound familiar?) but even they don't necessarily see the point of paying income taxes when their rich countrymen don't.

Some economists claim that the American money being pumped into Pakistan's coffers has given birth to a generation that we've enabled to cheat and hoard. For the few Pakistanis still clinging to some semblance of fiscal morality, the current state of financial inequity is foreboding - and laughable. When one official tried to pay his taxes a few years ago, his check was returned to him because the tax office suspected he had sinister motives.

Wow! I wonder how often the IRS refuses to accept payments?

Defense Spending?

It might be understandable if wealthy Pakistanis, by refusing to pay their income taxes, were making a concerted effort to force their government to cut waste and corruption. But can you effectively fight an ineffective bureaucracy with greed?

You're waiting for me to discuss the "redistribution of wealth" aspect of this story, aren't you? Well, I'm going to cut to the chase instead. Nobody like taxes, but can we agree a funding mechanism needs to exist in a society to pay for at least the basic functions of a government? Here in America, just because our monumental bureaucracy boasts an unwieldy and economically-stunting tax code can't really stand as proof that taxes, in and of themselves, are bad. The fact that we have ways of reducing spending, deficits, and debt in America but lack the combined political will to do so isn't the fault of taxation.

Having some of the country’s biggest tax cheats actually write the legislation that lets them get away with their tax evasion may work in Washington, but in Pakistan, where impunity runs even more rampant among the elite, and equitable law enforcement has never been widespread, it's emblematic of a dysfunctional government. Since our tax dollars are partly at stake here, we should have a say in this, don’t you think?

Just because we're trying to encourage Pakistan to help us catch Osama bin Laden and put the Taliban out of business, does that mean we can't expect Pakistan to shoulder a more proportional financial burden for the endeavor? Even if that means Pakistani legislators need to risk political suicide by enacting and enforcing a tax structure which puts more responsibility for the success of our mutual mission on their shoulders? If they're not willing to contribute their fair share, can they complain if they think Americans are trying to run the show?

What can we really expect from Pakistan if they’ve grown to so rely on US money that they can’t raise their own taxes? Is this good stewardship of US Treasury dollars? Is this a good way to nurture the Pakistanis in not only our shared military and security objectives, but also their sovereign obligations as a nation?

While I don't pretend to assume that having a more equitable tax system in Pakistan will generate sufficient revenue to exceed what they're receiving from us, at least there is merit in paying most of your own way, isn't there?

A Liberal Discovers the Solution

When has giving away anything really worked? PBS recently ran a story about self-professed liberal socialist activist Martin Fisher who realized giving away his water pumps to African subsistence farmers didn’t accomplish anything. A number of years ago, Fisher invented a nifty, all-in-one foot-powered water pump which he set about distributing for free in Africa. But before long, he realized that the very farmers he was hoping would expand their meager irrigation systems were simply letting the pumps languish from misuse. The reason? They didn't value the pumps because they hadn't paid anything for them.

In addition, he found himself drowning in the logistical headaches and costs of shipping, warehousing, and distributing his pumps to a people who paid nothing and cared little.

Fast forward to today, and Fisher now sells his same Super MoneyMaker pumps in Kenya for $100 apiece. And they're going like hotcakes. Conventional international aid workers scoffed in disgust, considering Fisher a traitor to the cause. But they can't deny farmers are actually using the pumps, and making their gardens grow. You see, it’s the intrinsic lure of profit potential that gets Fisher's impoverished customers to see the promise of watering their own land, growing crops for their family’s survival, and then expanding their little farm to grow extra vegetables to sell, and so on. Sure, $100 up-front is pretty steep for them, but the cost gives value.

Perhaps this story made news on PBS because capitalism seems so counter-cultural to many human aid activists. However, how many American politicians and bureaucrats have fallen into the same trap in Pakistan, where billions of our tax dollars take the place of what Pakistani citizens should be paying?

Am I crazy in drawing a parallel between selling water pumps and making Pakistan invest more of its own capital into the hunt for terrorists? Of course, the United States gives money to countries all over the world, and this practice is bloated with political considerations and expectations. Some might say we're buying off these countries so they'll go along with whatever coincides with our national interests. However, the tax structures in many of these countries aren't nearly as imperiled as Pakistan's. What is the extent to which we're really shooting ourselves in the foot by enabling an economic quagmire in what could be a pivotal marketplace in the Middle East?

Would it really hurt if, as one of the Pakistani economists proposes to the Times, the American government just shuts off our money spicket and tells them to fund their own treasury?

Maybe this would be just the incentive Pakistan needs to get serious about the war against terrorism.

Isn't that the kind of wealth redistribution Americans can embrace?
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