The recent imposition of higher income tax rates on the salaried class in Pakistan has triggered widespread concerns, reflecting a deeper disconnect between government policies and the economic realities faced by the most documented sector of the economy. The new income tax slabs for 2024, with increased rates for incomes over Rs 600,000, disproportionately burden those earning around PKR 50,000 a month. This exacerbates financial strain amidst high inflation reflecting a short-sighted economic policy.

The economic strain on the salaried class is palpable as inflation continues to disrupt household budgets. The increased tax rates fail to consider the economic hardships faced by working professionals. The higher tax rates will likely decrease disposable income, potentially slowing economic growth. This is particularly concerning, as it may lead to reduced consumer spending, further straining the economy. It is expected that the increased financial burden on salaried individuals will dampen their purchasing power, potentially causing ripple effects on various sectors of the economy.

The government’s approach to raising revenue by targeting the salaried class raises critical questions about fairness and economic policy. Salaried individuals who have little to no opportunity for tax evasion due to tax deductions at source, are seen as easy targets for revenue generation. It is problematic that the salaried class is the focus of taxation rather than expanding the tax base to include sectors like retail and agriculture, which contribute significantly to GDP but are frequently undertaxed. It highlights a persistent issue where the government opts for the path of least resistance rather than implementing comprehensive tax reforms that would ensure a fairer distribution of the tax burden.

The impact of the new tax policy on various income groups emphasises the disproportionate burden placed on middle-income workers. For instance, the tax burden of those making Rs 100,000 per month will increase from Rs 1,250 to Rs 2,500. Taxes will increase from Rs 11,650 to Rs 15,000 for those making Rs 183,333 per month. This is a significant rise that will probably put a burden on many families’ finances. Their disposable income will be drastically reduced due to the higher tax burden, which will make it harder for them to keep up with growing living expenses and less likely that they will be able to save or invest for the future.

Critics contend that before certainly enacting these tax increases, the government ought to have carried out an in-depth analysis of the effects on the salaried class. There should have been consideration given to other ways to increase revenue, such as decreasing tax evasion and raising taxes on currently undertaxed sectors. Although it is anticipated that the removal of tax exemptions in a number of sectors will bring in more money, this could further exacerbate inflation and complicate the state of the economy. The government’s unwillingness to deal with the underlying reasons for its income deficit and preference for raising taxes on sectors that comply shows a lack of strategic vision.

The public’s reaction to the tax increases has been overwhelmingly unfavourable, with concerns about the long-term impact on economic growth and consumer spending. The government must understand how critical it is to assist the salaried class, which is already burdened with high living expenses and limited opportunities for personal development. These issues risk the danger of escalating economic disparity and fueling taxpayer resentment by placing an increased tax burden on this group. Reduced tax compliance and a growing sense of injustice among the middle class, who already feel unfairly targeted, could result from this discontent.

The history of tax policy demonstrates the country’s reliance on the salaried class to generate revenue. The International Monetary Fund (IMF) put pressure on governments to raise salary tax rates significantly in order to reach anticipated revenue last year. The trend of rising taxes on the salaried class continues this year. This policy ignores the need for a more equitable tax structure that spreads the burden across the various economic sectors. The ongoing pressure on the salaried class points to a structural problem in fiscal policy that puts short-term revenue growth ahead of long-term economic stability.

Furthermore, legislators should consider long-term tax policies that support economic stability. Providing relief to the salaried class, such as exempting senior citizens and disabled persons from taxes, and increasing the tax exemption limit for lower-income earners would be steps in the right direction. These steps would not only provide immediate relief but also foster a more equitable tax system.

The existing tax policy risks sending experts away from Pakistan in search of better possibilities, contributing to a brain drain that the country cannot afford. The remaining people might find it difficult to make ends meet, which could fuel more social upheaval. The situation is made worse by the government’s unwillingness to tax other highly contributing sectors more effectively, which instills a sense of unfairness in those who diligently pay their taxes. The social contract between the government and its citizens may be threatened by this growing sense of injustice, which would have detrimental long-term effects on public trust and governance.

The government’s decision to raise taxes on the salaried class represents a short-term revenue collection strategy that fails to address Pakistan’s larger economic difficulties. The government faces the risk of impeding economic progress and escalating inequality by going after the most well-documented and complying sector of the economy. To ensure fairness for all taxpayers and promote sustainable economic development, a more equal and balanced tax policy is necessary, as are initiatives to increase tax base size and enhance enforcement. It is therefore necessary for policymakers to take a comprehensive strategy to taxation that puts the long-term health of the economy ahead of short-term revenue gains.