A troubling economic reality has emerged in Pakistan: workers who simply kept pace with inflation are now being taxed as if they received massive raises, even though their purchasing power has collapsed.
Between 2021 and 2024, Pakistan experienced cumulative inflation exceeding 90 percent. What cost 100 rupees three years ago now requires nearly 200 rupees. Yet income tax brackets—the thresholds determining who pays 15, 25, or 35 percent—have remained largely unchanged, creating what economists call “bracket creep.”
The consequences are stark. A household earning 100,000 rupees monthly in 2021 could afford modest urban living: rent, school fees, groceries, and utilities. Today, that same lifestyle costs around 200,000 rupees monthly. Workers fortunate enough to receive cost-of-living adjustments might now earn 150,000 to 175,000 rupees—but face a cruel double penalty.
First, their real purchasing power has declined significantly. Second, their nominal salary increase pushes them into higher tax brackets, forcing them to pay more tax on income that buys less than before.
The impact hits hardest at the top marginal rate. Pakistan’s highest tax bracket of 35 percent now applies to anyone earning above 342,000 rupees monthly—roughly 4.1 million rupees annually. In 2021, that income represented comfortable upper-middle-class living. Today, it describes mid-career professionals: senior engineers, experienced bankers, corporate managers in their late thirties.
These workers now pay the same marginal tax rate as individuals earning 1.5 million rupees monthly. The tax system has quietly decided these vastly different income levels deserve identical treatment.
The problem extends beyond fairness. When marginal salary increases face 25 to 35 percent taxation on income already losing ground to inflation, workers retain only 65 to 75 percent of additional earnings. The financial incentive to work harder, accept greater responsibility, or invest in skills development effectively disappears.
This matters critically for Pakistan’s broader economy. With only 7.5 to 8 million active tax filers among a workforce exceeding 80 million, the informal economy remains massive. Many stay informal precisely because formalization costs outweigh benefits. A tax structure that simultaneously increases real burdens on compliant earners while destroying incentives to earn more proves economically counterproductive.
The solution exists in automatic indexation—adjusting tax brackets annually according to consumer price inflation. Many developed economies have implemented this for decades. The principle is straightforward: if prices rise 20 percent, the income thresholds triggering higher tax rates should rise 20 percent too, keeping real tax burdens constant.
Had Pakistan’s 2021-22 tax slabs been fully indexed to cumulative inflation through 2024-25, the 35 percent bracket would begin around 7.5 to 8 million rupees annually instead of 4.1 million. The 25 percent bracket would start near 4 million rupees rather than 2.2 million.
This represents not a tax cut for the wealthy, but maintaining the tax system’s original intent. Without indexation, Pakistan effectively implements stealth tax increases requiring no legislation, announcement, or debate—while the country’s most compliant taxpayers bear the entire burden.
For Pakistan’s struggling middle class, already squeezed by relentless inflation, the message is clear: even standing still financially means moving backward in the government’s eyes.
