Apparently the tax gap in Bangladesh is up at 7.5% of the GDP. This is a number that will astonish any economist. The reason being that this tax gap is not what we all normally refer to as the tax gap.
The number comes from the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) -- one of that plethora of interfering organisations that so plague governments. The reason their number is so different from that used by everyone else is that they’re using a different definition.
The “tax gap” is the difference between how much revenue should be received by government, given what the tax laws are, and how much actually is. For the UK, this is about 40 billion pounds today, roughly enough, call it 2% of GDP.
This is the amount of tax people are dodging, either through taking care to fit their activities into a low-tax option, or just lying through their teeth to evade them. There are much higher estimates, up as high as 6% of the UK GDP, but these are from people talking about what tax revenue would be if the tax laws were as they think they should be rather than the “wrong” laws the government has actually passed.
It’s this which explains why the UNESCAP estimates for Bangladesh are so high, at 7.5% of everything everyone produces, that being the correct definition of GDP. They’ve decided they know better than the government of Bangladesh does what the tax laws should be. The gap is, therefore, the difference between what is actually collected and what would be if we were not a free country but were in fact ruled by all those foreigners at the UN.
Probably not a good idea, especially given the struggle to gain that freedom in the first place.
The reason they think taxation should be so much higher is interesting too. They’re insistent that investments have to be made into the Bangladeshi society and the economy in order to aid growth. They’re entirely right about that. They’re also insistent that tax should be collected so that the Bangladeshi government can make those investments. That’s not entirely right, that’s somewhere between wrong and ludicrous.
The mistake is to believe that a government must be making the investments. This simply isn’t for two entirely different reasons. The first is that other governments are happy enough to be making investments in societal and social matters in Bangladesh. OK, maybe we’d prefer not to be dependent upon the charity of foreigners but we know that at least some money is on offer in this manner.
People offering us free things? Why not take it?
The second is that there’s little reason -- except in very specific circumstances -- why the government needs to be the people doing the investing. It’s entirely possible for the private sector to do between much and near all of what governments often attempt themselves. Given the greater efficiency with which the private sector operates, it’s often sensible for us to use that private sector method as well.
Take, for example, mass transit. It’s a general assumption near everywhere that this is something that government will have to do. And if not directly operate, then at least subsidize, or build. The government needs to be involved, sure, but does it have to be doing it all?
Take Hong Kong -- the metro there, the subway, is entirely privately financed and run. At least, not from general tax revenues in any way. Having a subway stop nearby increases the value of land upon which you can put buildings.
So, tax the increase in that land value to pay for the subway stops. It’s not just laissez faire places like Hong Kong that do this, the last three expansions of rail lines in London have used the same technique, the Jubilee, Northern, and Crossrail expansions all did so.
Equally, it’s generally accepted that governments are going to have to pay for routine health care -- Singapore dares to disagree. There they insist that people save a portion of their wages to pay or it instead.
The UNESCAP assumptions are that the Bangladeshi government should be doing al the things which UNESCAP thinks it should be doing, therefore taxes should rise so that it can. That’s really not the way to be doing it at all.
Quite apart from anything else, we should consider is: What actually is the major Bangladeshi problem today? Sure, we know that GDP growth has been good, very good, these past couple of decades.
The country is getting richer about as fast as any place ever has done. But it’s from a low base and thus the country is still not rich yet. So, our biggest desire is that the growth continues as fast as possible for the time being. Once we’re all rich can we start spending some of that wealth on the details of a better place.
Ok, sure, that’s arguable but that would be my argument. And we do know that taxation reduces economic growth. Therefore, we want to have the minimum taxation possible with running the very basics of a society which allows economic growth.
Rather than that higher amount that international bureaucrats might think right to fulfil their own goals. Don’t forget, they’re arguing that you should be taxed for their pleasure, rather than you being taxed to pay for what you want and desire.
The real takeaway here though is that the UN numbers of a 7.5% of GDP tax gap are, by the normal standards, balderdash. They’ve reached this number by using a different definition.
They’re measuring what they think should be paid in tax if the law, society and democracy were different. That’s their view and they’re sticking to it. For the rest of us it’s our view which matters and we should be paying very little attention indeed to theirs.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.