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Tax collection: the dilemma

The Finance Minister will soon commence on his annual ritual of consulting the high and mighty of the populace to prepare the draft of the next budget. This is a good way to make them a party to the eventual text of the budget, and to choose the beneficiaries and the victims of the budget. He and his invited participants will no doubt repeat for the umpteenth time that the people of this country are very reluctant to pay taxes; they will lament that the tax-GDP ratio of the country ranks as one of the lowest in the world, perhaps even lower than the corruption index of the country.

The fact that most of the people he would be talking to are also among the lowest tax payers of their income class would not probably be noticed. Nor would it occur to him to talk to the ordinary people, who ultimately pay most of the taxes he collects. He would no doubt be goaded into widening the tax base, a fancy term for finding new taxpayers among the vendors, small business owners, and wage earners to fill up his treasure chest. The intended targets will of course try hard to avoid or minimize their tax burden.

No one likes giving up their hard-earned money to anyone, least of all to the government. If any money is to be extracted from them then either they have to be coerced into paying or coaxed into voluntarily giving money. All ancient rulers (and modern chandabaaz) depended on the former, and charities rely on the latter. Neither works well on its own; the former is costly to enforce, while the latter yields too little.

But the outcome is optimal if both approaches can be combined. Modern governments depend on both; they have harsh tax laws to enforce payment of taxes, and they provide a range of essential services to the people to convince them it is good for them to pay taxes to cover the costs of these desirable services.

Many years ago, the association of teachers of a university in a developed country came up with what they thought was a brilliant scheme to reduce their tax burden. They proposed asking the university administration to reduce the salaries of all teachers by a certain amount and use that money to buy cars for the university car pool. The university would then provide the teachers with these cars and fuel. Since the cost of university cars and maintenance are costs in the eyes of the taxmen, these will not be subjected to tax. Thus university teachers, like all government and business executives, could use cars without having to pay taxes.

If the teachers were on a 40 per cent tax bracket, they would have to earn and save $50,000 in order to buy a $30,000 car, but the university under the proposed scheme would need only $30,000 to buy the same car. So a teacher could get a car by forgoing only $30,000 in gross salary. A similar logic applied to fuel and maintenance costs.

The association executives must have thought they had a winning proposal, but to their great surprise the rank and file of the teachers shot it down. They argued that if they accepted the proposal many other organizations would also adopt similar schemes, which would reduce government revenue substantially. This would force the government to reduce some of the essential services such as education, health care and unemployment or old age benefits. In the end the teachers would not gain much.

The reason this story is being narrated here is to highlight the principal reason for rejecting a golden opportunity to legally reduce the tax burden by the most educated section of that developed country. It was not any high moral principle of public service, but rather self-interest that motivated them. The main reason that most people in developed (and other) countries do not object to paying high taxes is that they expect the government to reimburse them in terms of essential services, which are otherwise very difficult or costly to provide individually. When there is a mismatch between taxes and services, there are protests and demands for restoring the balance.

The people of this country are not much different from those of any other in terms of economic behaviour. For centuries they have been subjected to extortion by kings distantly located in Delhi or elsewhere and their local agents, rajahs, zamindars, etc., who sometimes took away more than one-half of the produce of the land of their subjects or their income without providing any useful visible services. Indeed, the tax money was essentially used for financing their luxurious lifestyle and oiling the machinery of extortion.

Hence, people had every reason to attempt to reduce their tax burden in any way they could. The most frequently used method was understating their actual produce or income (a reputed teacher of our university, the late Professor Abdullah Faruque, gave this answer a long time ago when he was asked why our people resort to lies so much.) It is only with the advent of modern government that some services were provided. Taxes then had a minimum economic rationale.

Do the quality and quantity of services provided by our government call for more taxes to be paid by ordinary people? Obviously the people do not think so and the government has not convinced them otherwise. It must be understood that the recorded accrual of tax revenue of the Ministry of Finance is only a part, perhaps the smaller part, of the total money paid by the people to government functionaries. Much of the total payment is lost in leakages. If all payments were included, the tax-GDP ratio of this country could perhaps compare favourably with that of some of the developed countries. Hence, the complaint of low tax-GDP ratio is itself misconstrued.

Bangladesh has obdurately maintained its status as one of the most corrupt nations in the world. The only reason why we have moved a few notches higher in the corruption scale is that some countries have outdone us in corrupt activities, and not because our own situation has improved. The signs of corruption are all too evident to the people. They do not need sermons to know why the costs of projects increase massively and the costs of administration become steeper. Nor do they need to be told how and why government or party functionaries recruit people for public jobs; many of them have gone through the ordeals themselves.

In this milieu, asking them to pay more taxes is to risk greater resentment of the general public. The Finance Minister learnt a lesson when he tried to raise money by imposing VAT on private universities. He is in a difficult position: much of the money paid by the public and business enterprises does not accrue to the government treasury, but to ask for even more makes him look like an accessory of the corrupt in the eyes of the public. He did not endear himself by using tax money to recapitalise state owned banks in order to compensate for the losses due to massive financial scams.

He does need to show a better tax-collection performance of his ministry, especially so because the performance during 2014-15 and in particular 2015-16 (till December) has been lacklustre. Hence, he would probably opt for the incremental approach. A little more tax would probably not cause a mass revolt; smaller protests can be asphyxiated by threats or police action. Hence, the forthcoming budget will probably not see any dramatic changes in terms of revenue collection. The Finance Minister will have to cut the coat according to the cloth he gets.

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