“We are not a welfare state; we lack the institutional nervous system, the documentation, and the moral contract to sustain one. Yet, our fiscal policy remains obsessed with squeezing the productive few to fund a bloated, unproductive bureaucracy. By early 2026, this taxation, under the disguise of collecting revenue, has strangled a resilient, hardworking population under the weight of a welfare-level tax regime without a single welfare benefit in return”—Muhammad Ammar Ansari, The Prohibition Zone: Why Pakistan’s Tax Policy is Cannibalising Growth.

“Taxes are important for other reasons that I will explain in this book. But the idea that taxes pay for what the government spends is pure fantasy… We can’t use deficits to solve problems if we continue to think of the deficit itself as a problem… Taxes are critically important, but there’s no reason to assume the government must raise taxes whenever it wants to invest in our economy…. Raising taxes when it’s not necessary can undermine fiscal stimulus, and raising the wrong kind of taxes can leave a nation vulnerable to accelerating inflation”—Stephanie Kelton, The Deficit Myth.

The above quotes aptly expose the dilemma of our successive governments—civil and military alike—in imposing higher and regressive taxes, pushing the overwhelming majority of citizens towards an unbearably high cost of living. Adding insult to injury, the state provides nothing in terms of welfare and has total apathy towards the economically vulnerable segments of society.

Pakistan’s fiscal crisis is not simply about deficits and numbers. It is about a broken social contract—a growing disconnect between what citizens pay and what they receive. High taxation without welfare delivery has not only failed to generate effective revenue but also has eroded trust, discouraged investment, and weakened the formal economy.

True fiscal health lies in building a fair, transparent, and service-oriented tax system that expands the base, rewards productivity, and restores public trust. Anything less condemns the country to stagnant growth under the weight of taxation without benefit—a burden Pakistan can no longer afford.

Pakistan’s growth failure is often explained through familiar clichés: low productivity, weak exports, lack of innovation, or insufficient entrepreneurship. These are symptoms, not causes. The real problem lies deeper—in a state-engineered cost structure that has made doing business prohibitively expensive and structurally irrational.

A recent private sector analysis reported by Nikkei Asia has quantified what businesses have been saying for years: operating a business in Pakistan is 34 percent more expensive than in comparable South Asian economies. This single statistic is not merely an indictment of policy; it is a post-mortem of Pakistan’s growth model. According to the study conducted by the Pakistan Business Forum (PBF), the excess cost is not incidental or cyclical. It is structural, cumulative, and policy-induced.

Ammar Ansari, in his op-ed of 6 February 2026, notes with concern: “With only 3.4 million effective taxpayers, a mere 4% of the 85.6 million-strong workforce funding the entire state, we have declared war on the middle class. Having forced this captive minority to bridge a multi-trillion rupee deficit while the informal elite remain untouched, we have classified excellence as a taxable offence and transparency as a path to insolvency”.

Instead of producing a dynamic class of risk-taking entrepreneurs, Pakistan’s policy environment is steadily converting potential job creators into job seekers

Instead of producing a dynamic class of risk-taking entrepreneurs, Pakistan’s policy environment is steadily converting potential job creators into job seekers

The workforce distribution data compiled by Gallup, Pakistan [See Picture below], covering nearly three decades, reveals a quiet but profound structural shift in Pakistan’s economy. In 1996–97, self-employment constituted around 28 percent of the workforce, alongside a significant share of contributing family and unpaid labour categories that traditionally reflect small enterprise activity, family businesses, and informal entrepreneurship.

By 2010–11, self-employment had already declined to 24.4 percent, while salaried employment rose sharply. The latest figures for 2024–25 complete this transformation: over 60 percent of the workforce is now salaried, while self-employment has fallen further, to just 21.8 percent, and unpaid family labour to about 14 percent. This is not a benign modernisation trend.

In Pakistan’s context, it signals the systematic erosion of entrepreneurial space, where rising energy costs, punitive taxation, regulatory harassment, and expensive credit have made independent business activity economically unviable. Instead of producing a dynamic class of risk-taking entrepreneurs, Pakistan’s policy environment is steadily converting potential job creators into job seekers—an outcome fundamentally incompatible with sustained growth, export expansion, and productivity-led development.

The above data confirm that not less than 50 million salaried persons are bearing unfair taxation, and about 100 million pre-paid and post-paid mobile users pay advance adjustable income tax of 15 percent, so much more than 4 percent of the workforce is funding the government, including the poorest of the poor. However, the remedy suggested by Ammar Ansari is worth consideration:

“…To break this debilitating cycle, Pakistan must decisively abandon this welfare mirage presented to us, and pivot towards an incentive-driven growth model that transforms the country into a high-performance economic tiger. Let us reclaim the promise of a nation that once stood proud as the economic tiger of the East.

This begins with a radical flat-tax revolution, slashing both corporate and individual income taxes to a competitive 20% cap. It would move the state out of the fiscal prohibited zone and signal not only to global markets that Pakistan is a sanctuary for ambition, but to our youth that they too can grow and build in their own country…”

The tragedy is not that Pakistan collects too little (which is a myth in terms of the tax-to-GDP ratio in our peculiar milieu), it is that it taxes irrationally—high taxes on a narrow tax base with low yield and tax expenditure of nearly Rs. 5 trillion. Despite successive mini-budgets, super taxes, levies on petroleum, enhanced withholding regimes, and expanded presumptive taxation, the debt-to-tax ratio remains shocking, over 700 percent.

A state that taxes like a welfare system but delivers like a fragile economy cannot endure

A state that taxes like a welfare system but delivers like a fragile economy cannot endure

Real potential at federal and provincial levels, through administrative reforms and rationalising rates, can exceed Rs. 34 trillion, yet actual collection is not even half of what is realistically achievable. The Federal Board of Revenue has consistently failed to cross even 50 percent of its true potential, while provincial authorities have underperformed against their own revenue capacities. It is not due to a scarcity of taxable capacity, but administrative and structural failure.

The paradox deepens when we examine the distribution of the burden. A microscopic segment of the population—salaried individuals, documented businesses, corporate entities, and compliant exporters—finances a bloated public apparatus. The informal economy thrives, retail and wholesale sectors remain largely undocumented, agriculture as a sector is scarcely taxed, and real estate speculation continues under preferential regimes. Instead of broadening the base, fiscal managers repeatedly resort to increasing rates on the already documented.

The result is predictable. Higher rates on a narrow base produce diminishing returns. When marginal rates approach confiscatory levels, compliance declines and informality expands. Pakistan has effectively weaponised withholding taxes, advance taxes, minimum taxes, and turnover-based presumptions to guarantee extraction even where profits do not exist. This creates an illusion of revenue growth while quietly eroding productive capacity.

Ammar Ansari, in his op-ed, correctly identifies the moral rupture: taxation without welfare. A genuine welfare state taxes broadly but redistributes efficiently—through universal healthcare, quality education, unemployment protection, and social mobility. Pakistan’s state extracts without delivering. Public schools decay, hospitals deteriorate, municipal services collapse, and citizens pay privately for what the Constitution promises unambiguously.

This breach of the social contract has economic consequences. Investors respond not merely to rates but to predictability and value. When taxes finance waste rather than infrastructure, the return on compliance diminishes. Entrepreneurs shift to informality; capital flees to real estate or offshore holdings; and documented manufacturing contracts. The informal sector becomes both refuge and resistance.

The current trajectory—higher taxes, lower yields, stagnant growth—is unsustainable. It risks transforming Pakistan into a high-extraction, low-delivery state, where economic vitality is sacrificed to administrative inertia. The solution is neither austerity alone nor extraction alone. It is a structural reform grounded in constitutional federalism, administrative integration, and moral reciprocity between the state and the citizen.

A state that taxes like a welfare system but delivers like a fragile economy cannot endure. Fiscal justice requires not merely collecting more, but collecting fairly, spending wisely, and governing constitutionally. Until that equilibrium is restored, Pakistan’s crisis will not be of revenue alone, but of legitimacy.

Pakistan needs a paradigm shift in tax policy and a revamping of national tax administration to generate sufficient resources for the federal and provincial governments, with drastic cuts in wasteful and unproductive expenses, and to bring innovation and efficiency to the public and private sectors. It must be the top priority in the forthcoming Budget 2026–27.

Through the democratic process, all provincial parliaments may pass resolutions under Article 144 of the Constitution, giving powers to the National Assembly and Senate to enact laws for harmonising sales tax on goods and services and income tax from all sources to be collected through a federalised tax agency. It would facilitate people dealing with a single body, a one-window facility at national and provincial levels, and would be responsible for all social welfare payments for all citizens equally in all provinces.

Tax reforms are meaningless without an effective tax administration and rational tax policy that can ultimately provide funds for social services to all citizens at the grassroots level, as envisaged under Article 140A of the Constitution. As an essential reform measure, we must concentrate on devolution of political, administrative, and financial responsibility and authority to the elected representatives of the local governments, after training candidates (preferably fresh graduates) with millions near home getting jobs for secretarial support, achieving the national target for employment.

© The Friday Times