Pakistan's 'lost curve'.

Many a moon ago, a high-profile ministerial meeting discussed the country's taxation system. A senior official intervened, saying, 'We have reached the Laffer Curve, no need for more taxation.' The minister was understandably impressed by the term and nodded in affirmation. The meeting told me it was apparent that none of our country's great wizards and finance gurus had any idea about the Laffer Theory. The term hence transformed into a political curve.

So, what is this curve all about? It is a Western capitalist phenomenon where taxation is a major revenue source. Derived from Arthur Laffer, an American economist, the Laffer Curve is a theoretical association between tax rates and the resulting amounts of tax revenues collected by the government. It assumes zero tax revenue generated at the extrema of tax rates. It simply means no one would pay the tax if they were too high.

The Laffer Curve is normally illustrated as a graph that initiates from a 0 percent tax rate with no tax revenue. It rises to a maximum level of tax revenue at a midway tax rate and then drops to zero tax revenue at a 100 percent tax rate. The curve is directly associated with the country's income and its constituent's capacity to pay taxes. As one would imagine, it varies from country to country.

The zero percent tax rate would logically mean zero revenues, and one at 100 percent would make them run away from tax payments. For Laffer, there is a point in between which is a win-win situation. This is the point where taxpayers are paying happily. Beyond this point, raising the tax would lead to a damaging effect on economic incentives. In other words, tax collection would decrease as the tax rate is raised.

Interestingly, since we are obsessed with western concepts, few people know that Laffer Curve is not new. Even Arthur Laffer admitted that he did not invent the curve but took it from Ibn Khaldun, a 14th-century Muslim and North African philosopher. Many ideas we today associate with Western free-market thinkers originated in Muslim countries during the Golden Age of Islam.

Unfortunately, the Laffer Curve's major fallacy is that politicians and policymakers often use it to justify lowering taxes and decreasing government revenue. For example, Eastern European countries that are more socialist than free economies have used the Laffer Curve to minimise taxes. However, they continue to remain on the left side of the curve. Does that help? Not really. Many Eastern...

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