Reform III

(Fostering Affirmative Tax Culture)

Background The term Culture refers to shared deep assumptions manifested into beliefs, values and norms. The significance of culture in general is that it is capable of eclipsing individuals beliefs, values and norms thus individuals behavior is controlled by the culture to which he or she belongs to. Furthermore, it is rather very difficult to expect or to mend individuals behaviors in some other direction in presence of a strong cultural influence. The only solution is to modify the culture to change individuals behavior. People living in the Indian sub continent and many similar countries which had been ruled by illicit monarchies and invaders were subjected to coercive tax payments to the Rulers of their time. This led to formation of typical belief system on both sides: The tax collectors were focused on mobilizing tax to their rulers advantage and felt no responsibility whatsoever towards the general public (tax payers). The tax payers responded to the tax collectors and their rulers aggressive attitude by considering avoidance of tax (tax evasion) as their right to save themselves against abuse from the rulers. Consequently, perceptions of irrationality and abuse vis--vis demand of tax money by the rulers settled deep into the minds of the tax payers and distrust on both sides continued to build up. Ironically, such a practice persisted even beyond the collapse of these regimes, because the legacies of coercive tax culture continued in the emerging Democratic regimes. Today we witness that tax evasion practices pose serious challenges for the tax organizations in particular and Governments in general in mobilizing adequate resources from within for the sustainable development and growth of a country, especially in a third world. Analyzing this menace from a neutral perspective, one can witness that this legacy culture in todays world is being nurtured by the convergence of tax payer legacy values that support tax evasion and personal monetary interests (greed) of a few tax collectors. However, if at all Pakistan has to increase its reliance on internally generated resources in equitable and efficient manner it must address the menace of legacy tax evasion culture at any cost. Proposal In the back drop of our discussions with the management of tax collecting agencies and tax payers feed back, we believe that systematic efforts are needed to mend this legacy culture of tax evasion into a truly Affirmative Tax Culture that provide for compatible beliefs, values and norms vis--vis reciprocal responsibilities of tax collecting agencies and the tax payers. We feel that this required change can come through a series of systematic interventions. At the first level, the tax policy needs to be revalidated vis--vis tax efficiency and equity in particular. Furthermore, rationalizing of a particular tax has to be replaced with rationality that satisfies the interests of all the stakeholders. This should be followed by tax payer education and empowerment. The education would include informing the tax payer of his or her tax responsibilities and the underlying rationality. Secondly,

to guide him or her on the tax policies, assessment criteria and procedures so that he or she can not be abused by third persons who may also be the tax collectors with lesser integrity. Empowering the tax payer would entail simplification and automation, where advantageous, of tax assessment and payment processes allowing him or her to be able to process tax payments without difficulty and dependence on third persons. Having said this, the last important element that would be instrumental in mending the tax culture is the effectiveness and efficiency of tax enforcement system. Generally, this refers to detecting tax defaulters. But we feel that the scope of tax enforcement should be expanded to recognizing the responsible tax payers along with detecting the defaulter followed by rewarding and/or punishing them, respectively. The figure 1 sequences and summaries the interventions.