Can a country sustain itself solely on taxes from the salaried class?

A strong and stable economy requires a well-balanced revenue model, with contributions from multiple sectors, including industries, businesses, and international trade. However, when a country disproportionately relies on taxing its salaried class while neglecting export growth, it raises concerns about long-term economic sustainability.

A steep increase in tax rates has dramatically raised the tax burden on the salaried class, with their contributions soaring by more than 300% compared to exporters in the first half of the current fiscal year. According to the Federal Board of Revenue (FBR), tax collection from the salaried class reached Rs243 billion in the first six months of this fiscal year, a significant jump from Rs157 billion collected during the same period last year. Even when combining the contributions of both exporters and retailers, salaried employees still paid more in income tax between July and December.

The tax hikes came in response to demands from the International Monetary Fund (IMF), leading to revised tax slabs, particularly for those earning between Rs0.5 million and Rs1 million per month. If this trend continues, the current fiscal year could mark a historic first—where salaried individuals contribute an unprecedented Rs500 billion in taxes by June 30, 2025. In comparison, the salaried class paid Rs367 billion in taxes in the previous fiscal year, which ended on June 30, 2024. Under the IMF’s $7 billion Extended Fund Facility (EFF), the tax rate for higher income brackets was raised to 40%, significantly increasing their tax liability. Meanwhile, the income tax rate for exporters was only raised from 1% to 2%, resulting in Rs80 billion in collections during the first half of this fiscal year—double the Rs40 billion paid during the same period last year when the rate was 1%.

Official FBR data further highlights this disparity: while salaried individuals paid Rs243 billion in taxes in the first half of the fiscal year, exporters—who earn in foreign currency—contributed only Rs80 billion. Additionally, the much-publicized Tajir Dost Scheme (TDS) aimed at retailers has largely failed. However, the FBR managed to boost revenue collections from retailers under sections 236G and 236H. The FBR faces an immense challenge in meeting its Rs12,970 billion tax collection target for the fiscal year. With a shortfall of Rs384 billion already recorded in the first six months, another deficit is expected in January 2025, putting additional pressure on the revenue authorities.

Meanwhile, Pakistan’s merchandise exports declined for the second consecutive month in December, primarily due to weakening international demand, according to data released by the Pakistan Bureau of Statistics (PBS). Despite strong momentum in July—driven by improved orders and exchange rate stability—export growth gradually slowed. The trend was as follows: 11.83% in July, 16% in August, 13.52% in September, 10.64% in October, 8.98% in November, and just 0.67% in December.

Despite the slowdown, Pakistan’s exports slightly increased on a month-to-month basis, reaching $2.84 billion in December, compared to $2.82 billion in the same month last year—a marginal rise of 0.28%. For the first half of FY25, total export earnings stood at $16.56 billion, reflecting a 10.52% increase from the $14.98 billion recorded in the same period last year. Many global buyers have shifted clothing orders away from Bangladesh and China, opting for Pakistani manufacturers instead. This shift presents a crucial opportunity for local exporters to expand their market share.

According to industry insiders, high input costs are squeezing profit margins, limiting reinvestment and expansion. To support exporters, the Ministry of Commerce has already submitted a set of proposals to the prime minister. In FY24, Pakistan’s merchandise exports rose by 10.54%, reaching $30.64 billion compared to $27.72 billion in FY23. On the import front, PBS data shows that Pakistan’s imports increased by 6.11% to $27.73 billion in the first half of FY25, up from $26.14 billion in the same period last year. December alone saw a sharp rise in imports, climbing to $5.28 billion from $4.50 billion a year ago—a month-on-month increase of 17.44%.

The International Monetary Fund (IMF) recently revised its import forecast for FY25 downward, reducing it by $3.3 billion from $60.5 billion to $57.2 billion. This revision aligns closely with the government’s own estimate of $57.3 billion. Pakistan’s trade deficit for July-December FY25 widened slightly to $11.17 billion, compared to $11.15 billion last year. However, December saw a significant spike, with the trade gap surging 34.8% to $2.44 billion from $1.82 billion in the same month last year. In FY24, the overall trade deficit narrowed to $24.08 billion from $27.47 billion the previous year, reflecting ongoing efforts to manage external imbalances.

Overburdening the salaried class with high taxes can generate short-term revenue, but it comes at a cost—lower disposable income, reduced purchasing power, and a demotivated workforce. This can lead to slower economic growth, a shrinking middle class, and decreased overall productivity. Meanwhile, exports bring in much-needed foreign exchange, create employment, and stimulate industrial expansion. Countries that focus on strengthening their export sector benefit from a diversified economy, making them less dependent on domestic tax collection.

Pakistan, for example, has significantly increased taxes on salaried individuals while collecting relatively little from exporters. Although this has temporarily boosted tax revenue, it does not provide a sustainable path to economic progress. A balanced approach—where taxation is fair and exports are encouraged—would be a more viable long-term strategy.

A country cannot sustain itself indefinitely by relying only on taxes from its salaried class. Without increasing exports and broadening the tax base, economic growth will remain sluggish, foreign reserves will dwindle, and financial strain on citizens will intensify. To achieve lasting economic stability, nations must focus on strengthening their export sectors, attracting foreign investment, and ensuring a fair and balanced taxation system that does not disproportionately burden salaried individuals.

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