Fiscal justice beyond the tax trap—III What exactly should we tax?

An empty plot that appreciates because a public road reaches its boundary and a workshop that creates jobs are both assets. They do not perform the same economic function. A fiscal system that overlooks the first while repeatedly taxing the second may raise money, but it also sends a message: holding wealth can be easier than putting it to productive use. Correcting that message requires precision about what we tax.

Part II examined the conditions under which lower rates can sustain revenue. A credible alternative must now identify the base. “Tax wealth” is a direction, not a complete policy. Land, buildings, business inventories, shares, deposits, inheritances and capital gains require different treatment. A dependable model begins by distinguishing them, rather than attaching one reassuringly small percentage to an undefined national stock.

A recurrent property tax generally charges ownership or occupation of immovable property. A net-wealth tax charges a person’s eligible assets less allowable liabilities. Capital-income taxation reaches returns such as rent, dividends and realised gains. Inheritance taxation applies when wealth changes hands across generations.^[1] These instruments can complement one another, but layering them without examining their combined incidence would reproduce the very arbitrariness, presently prevalent in Pakistan that we must remove.

The strongest immediate administrative case concerns visible immovable property. It cannot be transferred abroad, although ownership can be concealed and values disputed. Martin Grote and Jean-François Wen’s 2024 IMF note argues that broad property-tax bases with modest rates can support better local services.^[2]

Pakistan should examine that approach seriously: improve coverage and valuation, protect subsistence and hardship cases, and connect contributions with services citizens can see. Land deserves particular attention because public investment and urban development can create gains for owners who did not produce those improvements themselves.

Taxing the value of a site differs from taxing a newly constructed building. The latter may affect the incentive to improve property. Neither distinction eliminates political resistance, but it clarifies the economic choice. Blanket protection for property is not the same as protecting a modest home or a household unable to meet a sudden cash demand.

Our discussion with Dr. Ehtisham Ahmad offers useful common ground. His paper with Giorgio Brosio considers simpler property assessments using location and size, alongside digital information.^[3] Such methods can be a starting point where reliable market valuation is difficult. They still need testing: equal-sized properties can have radically different values. Published zones, clear adjustment factors, independent appeals and regular reassessment are essential if administrative simplicity is to remain compatible with fairness.

There is also a substantive argument for a wider wealth base. Guvenen and co-authors examine how wealth taxation can shift burdens towards less productive capital holders while improving the position of more productive entrepreneurs.^[4] The mechanism deserves attention. A tax on returns collects more from a person earning more on a given stock; a stock-based charge asks owners of comparable taxable wealth to contribute irrespective of their realised return.

Their subsequent work makes an important qualification explicit: book-value taxation and market-value taxation are not interchangeable. Market prices may capitalise expected future profits, causing more productive firms to attract higher valuations and liabilities. That can weaken the mechanism through which a wealth tax improves allocation.^[5]

Pakistan cannot cite a favourable model of business-asset taxation and then impose a different tax on market-valued enterprise equity as though the result automatically carries across. The strongest objection must also be confronted. The IMF’s How to ‘Tax Wealth’ generally prioritises stronger taxation of capital income and inheritances over introducing a new net-wealth tax.¹ An annual 2.5% charge on assets equals half a 5% gross return and exceeds a 2% return. These simple ratios do not settle the policy argument. They demonstrate why a rate that appears low against wealth can be demanding against current income, particularly during losses or weak returns.

There are design responses: substantial thresholds, instalments, narrowly defined deferral and carefully specified debt deductions. None is free. Deferral postpones cash receipts. Broad exemptions can encourage taxpayers to reclassify assets. Unrestricted debt deductions can invite artificial borrowing. A useful proposal must show the cost and distributive effect of these choices instead of treating relief provisions as an administrative afterthought.

Empirical research also warns against assuming a passive tax base. Colombian evidence identifies rapid reductions in declared wealth after wealth-tax changes, including responses around thresholds. Related research shows that stronger enforcement can improve compliance and progressivity.^[6]

These findings do not mean every reduction in reported wealth represents destroyed productive capital. Reporting, concealment, portfolio changes and genuine accumulation must be distinguished. They do mean that a credible forecast cannot assume full payment on an unchanged stock.

Counting the stock correctly is equally important. The full value of a company’s underlying assets cannot be added to the full value of the shareholders’ claims as though they were independent wealth. Residence, beneficial ownership, allowable debt and foreign assets need consistent rules. Gross domestic product measures an annual flow of production; it is not a national balance sheet. Multiplying it by a preferred rate does not estimate a wealth tax’s yield.

Consider an explicitly hypothetical illustration. An eligible stock of Rs. 100 trillion, an annual rate of 1% and combined effective collection of 60% produce Rs. 600 billion before administrative costs. The same arithmetic means that Rs. 1 trillion of receipts requires approximately Rs. 166.7 trillion of eligible stock at that rate and collection level.^[7] The calculation establishes a measurement task. It does not establish that Pakistan possesses that particular taxable base or can collect the assumed share.

Zakat gives the discussion an ethical foundation: ownership entails responsibility towards people in need. It does not make every asset Zakatable or every item of public expenditure eligible for its proceeds. Ushr requires its own treatment of agricultural output.

Recent IMF-published research discusses Zakat alongside other instruments, while the Business Recorder contribution cited in Part I presents it as complementary social finance.^[8] Neither establishes that all existing taxes can immediately be replaced by a universal wealth charge. Pakistan should, therefore, develop a coordinated model with distinct accounts and purposes: stronger contributions from under-taxed ownership; lower and predictable burdens on productive activity; and transparent Zakat and Ushr institutions operating within their legitimate remit.

Lawful taxing competence, equal citizenship, appeal rights and protection against duplicate liabilities must shape the design. A common collecting system cannot, by itself, answer who is entitled to levy or receive the money.

The choice is not between excusing wealth and taxing it blindly. We can begin with visible property, improve information on beneficial ownership and test broader alternatives against investment, distribution and net revenue.

A reform succeeds when it reaches previously protected capacity to pay without recreating insecurity elsewhere. That is how an appeal to fiscal justice becomes a defensible programme—and how the next discussion of Zakat and Ushr can proceed from moral conviction to accountable institutions.

Endnotes

^[1] Shafik Hebous, Alexander Klemm, Geerten Michielse and Carolina Osorio-Buitron, How to Tax Wealth, IMF How-To Note 2024/001 (2024), overview and discussion of taxes on wealth stocks, returns and transfers. The note is used here both to distinguish instruments and to state the principal counterargument to a general net-wealth tax.

^[2] Martin Grote and Jean-François Wen, How to Design and Implement Property Tax Reforms, IMF How-To Note 2024/006 (2024), especially “Recurrent Property Tax,” including tax base, valuation, exemptions and relief. The note provides design guidance, not a forecast of Pakistan’s receipts.

^[3] Ehtisham Ahmad and Giorgio Brosio, Evolution of theory of fiscal federalism and context: From the classics to digital transformation, supplied draft for the Jorge Martinez-Vazquez Festschrift, p. 13. Publication particulars and a public link have not been confirmed; the reference is to the author-supplied manuscript.

^[4] Fatih Guvenen, Gueorgui Kambourov, Burhanettin Kuruscu, Sergio Ocampo and Daphne Chen, “Use It or Lose It: Efficiency and Redistributional Effects of Wealth Taxation,” Quarterly Journal of Economics 138(2) (2023): 835–894. The article develops and calibrates a model; its welfare results are not Pakistan-specific causal estimates. Source

^[5] Fatih Guvenen, Gueorgui Kambourov, Burhan Kuruscu and Sergio Ocampo-Diaz, Book-Value Wealth Taxation, Capital Income Taxation, and Innovation, NBER Working Paper 32585 (2024), abstract and introductory discussion of book versus market values. A working-paper result is conditional on the specified model and tax base.

^[6] Juliana Londoño-Vélez and Javier Ávila-Mahecha, Behavioral Responses to Wealth Taxation: Evidence from Colombia, NBER Working Paper 32134 (2024). See also their “Enforcing Wealth Taxes in the Developing World: Quasi-experimental Evidence from Colombia,” American Economic Review: Insights 3(2) (2021): 131–148, DOI 10.1257/aeri.20200319. Reporting responses and enforcement findings are distinct from measured changes in real production.

^[7] Author’s illustrative accounting, not a Pakistani revenue estimate: cash yield before costs = eligible stock × rate × effective collection. Rs. 100 trillion × 0.01 × 0.60 = Rs. 0.6 trillion. For Rs. 1 trillion, the required stock is 1/(0.01 × 0.60) = Rs. 166.67 trillion. Exemptions must already be excluded from the eligible base; additional costs or credits reduce net proceeds.

^[8] Mario Mansour and Shafik Hebous, eds., Taxation in the Middle East and North Africa: Prospects and Possibilities (IMF, 2026), ch. 3, p. 46, n. 13, and ch. 4, p. 74, n. 6; Manan Aslam and Shahzaib Shaoor, “Rebuilding fiscal justice: a Zakat-based alternative to Pakistan’s tax trap,” Business Recorder, 14 October 2026. The latter expressly advocates a complementary role, rather than wholesale replacement of taxation.

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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 an 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.