IN the 1930s, John Maynard Keynes argued that lower tax rates can sometimes increase government revenues. He wrote in his 1933 book The Means to Prosperity: `Nor should the argument seem strange that taxation may be so high as to defeat its object, and that given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.` More than half a millennium before him, the great Muslim scholar Ibne Khaldun had also argued in his masterpiece, The Muqaddimah, that high taxes were often a factor in causing empires to collapse, resulting in lower revenuesdespite higher rates.

In between them, Jonathan Swift, the satirist and author of Gulliver`s Travels, in a 1728 article, noted the negative effects of high tax rates on government revenues. He also influenced many of his contemporaries, like Adam Smith, regarding the harmful effects of high tax rates on revenues.

In Pakistan, a debate on the impact of higher tax rates on the economy and growth has been ongoing for the past few years. It has gained momentum in the last year due to an exorbitant increase in income tax rates on salaried classes.

Already burdened with the responsibility of helping the government meet its annual revenue targets, the organised businesses, too, are struggling under heavy taxation.despite higher rates.

In between them, Jonathan Swift, the satirist and author of Gulliver`s Travels, in a 1728 article, noted the negative effects of high tax rates on government revenues. He also influenced many of his contemporaries, like Adam Smith, regarding the harmful effects of high tax rates on revenues.

In Pakistan, a debate on the impact of higher tax rates on the economy and growth has been ongoing for the past few years. It has gained momentum in the last year due to an exorbitant increase in income tax rates on salaried classes.

Already burdened with the responsibility of helping the government meet its annual revenue targets, the organised businesses, too, are struggling under heavy taxation.Higher tax rates are not the only issue Pakistan is faced with today; its tax policy is at a tangent with the broader economic goals of investment promotion, productivity boost, job creation, and poverty alleviation for faster growth. In Pakistan, the rate of taxation has risen consistently over the last several years.

Concomitantly, the economic growth rate has consistently dropped during that period, private investment plunged, unemployment went up and poverty increased.

An article links between taxes and economic growth: some empirical evidence on the World Bank website says that evidence from 20 countries, spanning almost the entire spectrum of world incomes, shows that those with lower taxes experienced a more rapid expansion of investment, productivity, employment, and government services, and had better growth rates, without discriminating against the poor.

The evidence suggests that tax policy affects economic performance via two basic mechanisms: (i) lower taxes result in higher real returns to savings, investment, work, and innovation, and higher returns have stimulated a larger aggregate supply of these factors of production and thus raised total output; and (ii) the focus and types of fiscal incentives provided by low-tax countries appear to have shifted resources from less productive to more productive sectors and activities; thus increasing the overall efficiency of resource utilisation.

Even though the study says that establishing a direct causal relationship between lower taxes and economic growth can be challenging, as otherfactors like economic policies, infrastructure, and global market conditions also play significant roles. Yet, the research on tax policy`s impact on economic growth underlines how tax policy can help policymakers boost investments in those segments of the economy that they want to upliftfor greater economic reward, job generation, export growth, and so on. A prudent tax policy aligned with growth objectives, emphasises the author, should stimulate `higher output by increasing incentives to save, to invest, to work hard, and to innovate.` Pakistan`s tax dilemma higher rates and policy bias against growth, investment and exports stems from successive government`s failure to raise the tax-to-GDP ratio, one of the lowest in the world, from less than 10 per cent, primarily due to a lack of political will to tax the powerful interest groups, such as retailers, wholesalers, real estate owners, and large farmers, into the tax net. For many years now, the country has been running high fiscal deficits averaging around7pc, forcing it to tax growth, investment, and savings to bridge the budget`s revenue needs.

There are numerous examples of the negative, growth-inhabiting impact of skewed tax policy on various sectors of the economy, with significant consequences not just for investment and jobs but also for public health. However, the formal, packaged fruit-based juice industry stands out in showing how the regressive taxation on a single product can simultaneously impact various segments of the economy.

In 2023, the sales of the formal juice manufacturing industry were projected to grow to Rs72bn.

However, the imposition of federal excise duty (FED) 10pc in the supplementary finance bill in 2023 and doubling it to 20pc in the budget for FY24 on top of the 18pc sales tax has led to a dramatic downturn of 45pc in its peak sales to Rs42bn due to substantial increase in the retail juice prices, putting the products beyond the reach of the middle classes and severely affecting the government`s revenue projections from the increased taxation on this sector.

However, the contraction in the organised fruit juice industry is more than a revenue decline; it represents a significant economic disruption that has resulted in stalled investment in expansion and new projects for the past couple of years and job losses.

It also has had negative effects on fruit growers and the larger agricultural economy as mango procurement has dropped by more than a third from 31,000 tonnes in 2017-18 to just 20,233 tonnes in the past year, undermining rural livelihoods, due7pc, forcing it to tax growth, investment, and savings to bridge the budget`s revenue needs.

There are numerous examples of the negative, growth-inhabiting impact of skewed tax policy on various sectors of the economy, with significant consequences not just for investment and jobs but also for public health. However, the formal, packaged fruit-based juice industry stands out in showing how the regressive taxation on a single product can simultaneously impact various segments of the economy.

In 2023, the sales of the formal juice manufacturing industry were projected to grow to Rs72bn.

However, the imposition of federal excise duty (FED) 10pc in the supplementary finance bill in 2023 and doubling it to 20pc in the budget for FY24 on top of the 18pc sales tax has led to a dramatic downturn of 45pc in its peak sales to Rs42bn due to substantial increase in the retail juice prices, putting the products beyond the reach of the middle classes and severely affecting the government`s revenue projections from the increased taxation on this sector.

However, the contraction in the organised fruit juice industry is more than a revenue decline; it represents a significant economic disruption that has resulted in stalled investment in expansion and new projects for the past couple of years and job losses.

It also has had negative effects on fruit growers and the larger agricultural economy as mango procurement has dropped by more than a third from 31,000 tonnes in 2017-18 to just 20,233 tonnes in the past year, undermining rural livelihoods, due to decreased demand from the industry.

The higher juice tax has also seen significant growth in cheaper, often substandard products from the undocumented sector because of consumers` affordability concerns, eroding the market share of the documented industry. Industry estimates suggest that the undocumented segment has grown substantially in the past year, fueled by the tax disparity. These players, who operate outside regulatory frameworks, do not pay taxes, consequently leading to lost tax revenue.

Historically, the packaged juice industry has helped reduce fruit wastage by purchasing large volumes during harvest while stabilising prices, supporting farmers, and introducing best practices in agriculture and supply chain management. Shrinking industry volumes, however, are reversing these.

In order to revive the structured juice industry and encourage healthier consumer choices, the industry sources plead that Pakistan adopts a more progressive taxation model, similar to the other countries that offer preferential taxtreatment to fruit-based products.

Even a 5pc reduction in FED would support the industry in getting back on its feet, enhance product affordability, restore market competitiveness, and generate greater revenues through higher sales volumes and broader tax compliance. Not just that, it would unleash the export potential of the industry, which is already shipping its products to more than 30 countries across the world.

At the same time, the government must address the issue of the unchecked rise of the undocumented sector. This could be achieved by establishing a dedicated task force comprising representatives from the government health department, food regulatory authorities, and the formal juice industry, which will include representatives of the private sector.

The regressive taxation on the formal juice industry underlines every negative impact a bad tax policy can have on growth, investment, jobs, government revenues and public health. Fixing it requires realisation and a lot of political will on the part of the tax policymakers.m