The week-long income tax fair has come to an end, with a record collection of Tk24,689 crore from 487,573 tax-payers, and issuance of 39,743 new e-TIN numbers. No doubt the amount has exceeded the records from previous years.
But is it enough to close the 7.5% tax revenue-GDP ratio, so as to minimize the estimated budget deficit? Is government expenditure showing a multiplier effect inducing further investment and development, or a ripple effect disrupting investment and development, and eventually leading to a collapse in the business ecosystem?
How much is the political climate responsible for the associated risks? Is organizing a fair enough to motivate the citizens to pay their due share of taxes? Can there be alternative measures to collect direct taxes? Is it possible for the capital market to build a back-up investment infrastructure by extending its reach to the masses?
Can it prevent the “crowding out” effect?
According to the World Economic Forum (WEF), Bangladesh’s economy has been identified as the least competitive in South Asia this year -- the predominant reasons being the lack of unsustainable institutions and infrastructures. Limited innovation capability, macroeconomic instability, and saturated product and labour market are the key factors.
Not only that, according to the World Bank, Bangladesh scores the least in South Asia in terms of ease in doing/running business(es). Despite having a striking demographic dividend, businesses fail to start and flourish because of issues like difficulty in getting credit, protecting investor rights, and dealing with construction and trade permits, among others.
A sustainable tax system is an indispensable demand of a nation, particularly in case of direct taxes which include income tax, corporation tax, and property and asset taxes.
In economics, there are basically two types of fiscal policies -- expansionary and contractionary. In the budget FY 18-19, an expansionary fiscal policy has been undertaken. The government expenditure has increased and direct taxes (corporate tax) have been reduced.
From a development perspective, this is a very commendable agenda. And yes, people have been motivated to pay income tax, as has been observed comparing previous years. However, taking corruption completely out of the picture, we still cannot say that the tax compliance is enough for a strong manufacturing base.
Buying into the “creatures of desire” thought, I think economics is intrinsic to humans. As such, all of us have a motivation behind doing everything we do. A key microeconomic principle is that “people respond to incentives.” I would like to establish that the government is also responsive towards incentives.
So, how can the government increase people’s motivation in order to get their own incentive? I guess, it has to be an exchange -- the tax revenue being the incentive of the government in this case. Now, what kind of incentive motivates people?
An income tax fair allows people to pay their taxes in a reasonably easy fashion as they don’t have to go through the hassle of dealing with inefficient and corrupt bankers and tax officials. But how else is it possible to motivate people to deposit their treasury to the state via direct taxes?
Digitally re-adjusting tax administration
Enough qualms can be heard about the analog process of direct tax-revenue collection even though the process has been made digital long ago. There needs to be a fundamental change in the overall tax transaction process so that an authentic tax net can be identified, and the tax bracket can be justified and imposed on the same. An easy access to the online tax portal is crucial for reducing the tax revenue-GDP ratio.
Now, there are two types of multiplier effects: The government expenditure multiplier and the tax multiplier, both of which contribute towards increasing the income/GDP through increased investment. Again, there can be a ripple effect contributing towards the exact opposite.
The long-standing paradox of Bangladesh’s economic growth and development definitely proves the co-existence of both. Why else would we, despite being a regional hot-spot for investment, fail so miserably at the ease of doing business index?
Increased dependence on capital market
Comprehensively speaking, our capital market is still not as strong as is needed for a more globally competitive economy. It is either because of the lack of attention/awareness among people, or their mental apathy towards the dynamism of the market with respect to banks and financial institutions.
I am not an expert on this. But I do know that an expansionary fiscal policy causes increase in economic activities in the capital market, and hence is conducive, for both the market and the new businesses depending on this market, to flourish.
Now, a criticism of the expansionary fiscal policy is the “crowding-out” effect. It is basically a situation when increases in government borrowing leads to a reduction in private investment due to an increase in the interest rate. Sooner or later, this phenomenon dampens the initial increase of total investment spending.
I think increasing dependence on our internal capital market can really help us in preventing the crowding out effect, and thus show positive and practical results in the government expenditure and tax multipliers.
Maisha Mehzabeen works at the Dhaka Tribune and is a graduate in economics.