Bankruptcy of ideas—IV The extractive state

The first three articles in this series examined how Pakistan accumulated debt, how debtocracy narrowed policy choices, and how borrowing increasingly financed yesterday’s liabilities rather than tomorrow’s development.

A natural question follows. How did the state respond when debt servicing began consuming ever larger portions of public resources? The answer was not structural reform. The answer was extraction. Instead of fundamentally redesigning the tax system, successive governments chose a simpler path: collect more from those already visible to the state.

This choice gradually transformed Pakistan from a low-compliance economy into an increasingly extractive state. The distinction is important. A developmental state taxes productive activity to finance public goods that increase productivity and prosperity. An extractive, in our case predatory as well, state taxes because it needs revenue but fails to generate corresponding improvements in public services, infrastructure or economic opportunity.

Citizens pay more but receive little in return. Pakistan increasingly resembles the latter model. Official rhetoric frequently claims that millions remain outside the tax net. The phrase has been repeated so often that it is rarely questioned. Yet the evidence points in a different direction.

Millions of electricity consumers pay advance income tax through utility bills. Mobile phone users pay advance taxes on usage and recharge. Bank account holders face withholding taxes. Property transactions attract multiple federal and provincial levies. Salaried individuals are taxed at source. Contractors, suppliers, exporters and service providers operate within an elaborate withholding regime. The issue is, thus, not the absence of taxation.

The issue is the absence of effective and equitable taxation. Pakistan’s tax system increasingly relies on withholding and advance taxes collected before actual income determination. In many cases, these taxes function as final liabilities rather than adjustable advance payments. This approach undoubtedly generates revenue. However, it also generates distortion.

The documented sector becomes easier to tax each year because it leaves digital and financial footprints. The undocumented and politically protected sectors remain comparatively difficult to reach. As a result, tax policy begins to reward informality and penalise compliance.

The consequences extend beyond fairness. When governments repeatedly increase burdens on compliant businesses and individuals, investment incentives weaken. Resources are diverted from productive activity toward tax planning, litigation and survival strategies. Economic growth suffers. The petroleum levy provides another illustration.

Rather than expanding the tax base through comprehensive reform, governments increasingly relied on petroleum levy collections. The attraction is obvious. Petroleum levy generates substantial revenues without entering the divisible pool.

The burden, however, falls on the entire economy. Transport costs rise. Production costs rise. Agricultural costs rise. Household budgets shrink. Inflationary pressures spread through supply chains. The state receives revenue while economic activity absorbs the cost.

This is characteristic of extraction rather than development. The same pattern appears elsewhere. When fiscal pressures intensify, governments rarely begin by examining tax expenditures, untaxed rents, inefficient state-owned enterprises or privileged sectors. They begin with those already documented and already contributing.

The result is a paradox. The more compliant a citizen or business becomes, the more visible it becomes to revenue authorities. The more visible it becomes, the greater the burden it often carries. Such a system creates perverse incentives.

Informality becomes rational. Documentation becomes costly. Compliance becomes a disadvantage. No successful economy has achieved sustained prosperity on such foundations. The tragedy is that Pakistan possesses substantial untapped taxable capacity.

Large economic rents remain inadequately taxed. Agricultural income taxation remains weak. Real-estate speculation continues enjoying favourable treatment. Numerous concessions survive despite questionable economic justification. Yet policy repeatedly returns to the same pool of compliant taxpayers.

This is not because alternative options are unavailable. It is because extraction is politically easier than reform. Reform confronts entrenched interests. Extraction targets those with limited political protection. Over time, this dynamic produces a fiscal system designed not to maximise growth but to maximise short-term revenue collection.

The distinction is crucial. A developmental state asks how taxation can support investment, productivity and long-term prosperity. An extractive state asks how much more can be collected this year.

The Economic Survey 2025-26 reveals the consequences of this approach. Growth remains modest. Investment remains insufficient. Exports remain below potential. Debt servicing continues absorbing fiscal space. Yet taxpayers continue facing rising burdens.

The problem therefore is not merely taxation. The problem is taxation without development. Citizens tolerate taxation when they observe corresponding improvements in public services, infrastructure, security and economic opportunity. They become increasingly skeptical when taxes rise while basic public goods remain inadequate. This erosion of trust ultimately weakens voluntary compliance and damages the social contract itself. Pakistan’s fiscal challenge cannot be solved by extraction alone.

A sustainable solution requires taxing economic rents before productive effort, simplifying the tax system, eliminating unjustified concessions, strengthening local government finance and linking taxation to visible public benefits. Until that happens, the state will continue collecting more while struggling to create prosperity.

The next part examines one of the most important but least discussed dimensions of this problem: the hidden budget of privilege embodied in tax expenditures, exemptions and preferential treatment that quietly transfer public resources while governments simultaneously claim fiscal scarcity.

[To be continued]

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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.