Stagnant tax brackets mean middle and upper-middle earners are pushed into higher rates despite falling real incomes.
Image:Pakitan Economic NET
KARACHI: Pakistan’s high inflation has quietly increased the tax burden on salaried workers, even without any formal change in tax law.
Since 2021, cumulative inflation has crossed 90%, meaning goods and services that once cost Rs100 now cost nearly double. However, income tax brackets have remained largely unchanged.
As a result, workers earning modest salary increases are being pushed into higher tax slabs, even though their real purchasing power has not improved.
For example, a monthly income of Rs100,000 in 2021 could support a basic urban lifestyle. Today, the same lifestyle can cost around Rs200,000, yet tax thresholds have not been adjusted to reflect this change.
This creates what economists call “bracket creep,” where inflation effectively increases tax rates without any policy announcement.
The issue is most visible among middle and upper-middle earners, such as professionals earning between Rs150,000 and Rs350,000 per month. Many are now taxed at rates of up to 25%–35%, similar to much higher earners.
Economists warn that this reduces incentives to work harder or earn more, as additional income is heavily taxed while living costs continue to rise.
Experts suggest indexing tax brackets to inflation so that thresholds automatically adjust with rising prices, as done in several other countries. This would keep the real tax burden stable.
They also propose a one-time revision of tax slabs to reflect the sharp inflation of recent years.
Without such reforms, the salaried class continues to bear a disproportionate tax burden, while broader tax collection from untaxed sectors remains limited.
