Columns

The recent announcement that the government would introduce a property tax caused a wave of opposition to it in parliament. Opposition members interpreted it as another burden on people.

Government MPs explained that the property tax would not apply to owner-occupied houses and that it was a tax on the rich who owned several houses.

Announcement

It is difficult to understand why the features of the property tax were not mentioned when making the announcement. The government soon realised its failure to explain the details of the property tax. Government ministers tried hard to explain that people who own only one house would not have to pay the tax.

Wealth tax

Similarly, the wealth tax would fall on the rich. They also pointed out that a wealth tax was introduced by Dr. N.M. Perera as Finance Minister in the coalition government of Mrs. Sirimavo Bandaranaike.

Discontent

The widespread discontent with recent increases in personal income taxes and the imposition of the Value Added Tax (VAT) on consumer items has evoked considerable opposition. However, the introduction of a wealth tax and a property tax on the rich should enable a reduction of these taxes that fall on the working classes, as well as enhance revenue, provided they are effectively implemented. Hopefully, these taxes will be able to target high-income tax evaders.

Tax reduction

Tax reduction will undoubtedly be an election promise of opposition parties. This raises the question as to whether these taxes are equitable and whether the needed revenue could have been gathered by taxes that were more equitable and effective.

It is probably this that made the government propose a property tax and a wealth tax. However, without details of these taxes, the opposition was able to criticise them as falling on middle-income earners.

Why no announcement?

It is difficult to understand why the features of the property tax were not mentioned when making the announcement. Perhaps the details of the new taxes are still on the drawing board!

Fiscal deficit

The reduction of the fiscal deficit is vital for economic stability and growth. It could be achieved either by increased revenue collection or by reducing government expenditure. A two-pronged strategy of increasing revenue and reducing expenditures should be implemented. However, the IMF has advocated a revenue-increasing strategy rather than an expenditure-reducing one.

Rationale

The rationale for this is that our revenue collection was as low as 8 percent of GDP. The current revenue collection is one of the lowest revenue-to-GDP ratios in the world. Countries with our level of per capita income collect about 12 percent of GDP in revenue. Undoubtedly, we too must achieve such a target, irrespective of complying with the IMF’s conditions for the Extended Finance Facility (EFF).

Tax avoidance

This is due to tax avoidance and tax evasion by high-income earners. On the other hand, expenditure is in the region of 19 percent of GDP, which is an acceptable level.

However, this analysis has not taken into account the large amount of unnecessary, extravagant, and wasteful government expenditures.

Equitable taxes

What is needed is a more equitable system of taxation, whose incidence falls on the rich and reduces tax evasion and tax avoidance, which are the main causes of the low tax-to-GDP ratio. As far as the IMF is concerned, the achievement of a lower fiscal deficit is what matters.

Objective

The objective of fiscal policy should be to reduce the fiscal deficit in an equitable and pragmatic manner. Revenue must be increased by higher taxes, whose incidence falls on the rich and the large number who evade and avoid taxes. It must be complemented by reducing government expenditure.

Rationale

Tax avoidance and tax evasion could be reduced and revenue substantially enhanced by indirect taxes on the expenditures of the affluent. This would include much higher annual fees on high-value motor car licences, progressive property taxes and higher taxes on articles of luxury consumption. In addition to the revenue-enhancing strategy, it should be complemented with a reduction in government expenditure.

Expenditure

The curtailment of government expenditure would not only reduce expenditure but also make taxation more acceptable to people. The popular view is that taxes are spent wastefully by the government, and therefore evading or avoiding taxes is morally justified. If there is greater accountability in government expenditure, there will be a greater willingness to pay taxes.

Wasteful

A clear indication of popular dissatisfaction has been the large defence expenditure, high expenditure on foreign missions, ceremonies, and perquisites (perks) of ministers and parliamentarians. The reduction of the large expenditure on a bloated public service, though necessary, is difficult. Curtailing these is undoubtedly difficult owing to the country’s political culture, but imperative.

Professionals

The increased income tax measures have been opposed by professionals, especially doctors and university academics. Professions contend that their incomes are inadequate to meet the escalating prices of food, petrol, gas, electricity, and other essentials. This, no doubt, is the reason for a high number of professionals leaving the country and paralysing, especially health facilities and university education.

Doctors

The number of doctors who have gone abroad in recent years is huge—over a thousand. Many are waiting to leave as soon as they get employment abroad.

Dilemma

The next government, whichever party that is, is no doubt in a serious dilemma. On the one hand, the higher taxation measures are not yielding adequate revenue. On the other hand, the recent increases in taxes are creating hardships and are opposed by political parties. Even the SLPP, which supports these measures in Parliament, is opposed to the higher taxes.

Inadequate revenue

Sri Lanka’s revenue collection is one of the lowest in the world due to widespread tax avoidance and evasion, corruption, and inefficient tax administration. Reforming these weaknesses is a long-term challenge.

Option

Therefore, the realistic option is to introduce a system that imposes heavy taxes on the expenditures of the affluent.

Conclusion

Reducing the fiscal deficit is imperative for economic stability and growth. It must be achieved by a two-pronged strategy of increasing revenue and reducing expenditure. Revenue must be increased by the taxation of the rich through expenditure taxes on luxury items.

The proposals to introduce property and wealth taxes are a move in the right direction. Although this is a means of collecting revenue from the rich who evade taxes, its success depends on its implementation. Inefficiency and corruption could render it an inadequate measure to harness taxes from a large number of those who evade and avoid taxes.