A glut of unearned incomes

Published May 26, 2008

A foreigner in the streets of Karachi sees a number of new luxurious cars like Mercedes Benz, a string of new BMW’s and a few Porsches all blocked by traffic jam which is a common sight in the city, more so when VVIPS pass by. He wonders where the money comes from for this luxury?

The country’s common mode of travel for an ordinary man-- when an over-loaded bus is not available — is an auto-rickshaw. Not everyone can afford it. The country does not make cars other than small and medium vehicles. Many of the drivers of these luxury vehicles are young men and cannot afford such expensive imported cars except through the generosity of their parents.

All this affluence is explained by generous bank loans and diversified sources of incomes. Hence there is a flood of luxury imports including those of luxury cars. And the current account deficit is mounting.

There is excess money in the market , much of it is unearned income. The State Bank printed Rs550 billion currency and pumped it into the market instead of the budgeted Rs133 billion for the financing deficit.

A major source of large money supply is tax exemption or evasion and a big informal sector. Agriculture is for all practical purpose exempt from income tax in spite of the high support price and the soaring price of wheat. That made some people make easy money and spend it easily.

In a country where the informal sector is very large and a lot of money is afloat at high interest rates, much of the agriculture credit is provided by money-lenders. Businesses yield high profits where people make money, by hook or by crook. And a significant amount of tax-evaded money is locked in speculation in stocks, currency and commodity trading.

Exports of manufactures are nominally taxed and much of what is taxed is refunded . There is excessive corruption. One has to pay even for filing an FIR after a murder has been committed.

Banks manage their own security by hiring private security guards. But except a few private security systems, others are not reliable. Some of its members indulge in bank robberies and rob the banks they are committed to guard. The lockers are no longer safe.

Then Pakistan has been declared third to fifth most corrupt country in the world by the Amnesty International. The tainted money goes abroad and comes back partly as home remittances.

Overall, beginning with tax evasion on agricultural income and the informal sector , a huge amount-- mostly unearned—gives the highest rate of profit in the region. Hence the flashy cars and splendid mansions as well as other luxuries , to the great agony of the poor and the low income group.Usually ,the sources of unearned income are too many and they cannot be controlled and the profit is lucrative and protected, people spend freely. And when the corrupt are too many and too daring, they will spend thoughtlessly. That was how Pakistan has come to be regarded as one the most corrupt country.

The real problem is that people take a pride in the ill-gotten wealth which is exhibited openly. So the people will have to fight to put to an end the unearned incomes and ensure progressive taxation. The renter class should be allowed to prosper at the cost of the real economy.

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