Tax Increment Financing in Pakistan

Markets fail in the provision of public goods. Public goods are non-rival and non-exclusive. It creates the problem of free riding. Hence, public goods and infrastructure is often provided by the governments. As discussed in endogenous growth models, the public infrastructure and capital goods can enable the private sector’s production processes to experience increasing returns to scale. This can result in permanent source of economic growth in an economy. Given that public infrastructure is important for economic growth, the issue is how the government of Pakistan can mobilize enough resources to improve the public infrastructure and expand it. We argue that by way of tax increment financing, it can achieve sufficient funds through which the public infrastructure can be provided in urban centers. The rationale for tax increment financing rests on the fact that public infrastructure development leads to positive externalities. If Government owns the unused land which can potentially be used for commercial and residential use, it can lease it on long term basis and generate sufficient lease income. By issuing public securities, it can generate the seed capital and which can be serviced via these lease payments. The seed capital can also come from tax increment financing. This new proposal can help in reducing i) urban congestion, ii) urban crimes, iii) reduce prices of real estate, iv) widen the urban centers, v) generate employment in new urban centers, vi) facilitate closer migration to wide choice of urban centers, vii) create new growth nodes and production zones and viii) reduce ethnical conflicts that arise from ethnical diversity in congested urban centers.