Widespread direct tax compliance is an achievable target for Bangladesh, especially after our graduation from the LDC bloc with an economic vulnerability index (EVI) of only 25; gross national income (GNI) per capita of $1,610, and a good human assets index (HAI) of 72.9.
Our nation is currently suffering from “preference erosion” due to this upward status shift; trade preferences, relaxed tariffs, and international aids/grants/loans are going to be minimized. So, isn’t it our responsibility to help the state in upholding this prized status by making sure we don’t dodge or ignore direct tax compliance?
Measures to prevent deadweight loss
Generally, a representative government intervenes in the free market by setting price floors or ceilings. A deadweight loss is a combination of losses in both consumer surplus and producer surplus.
Now, when an indirect tax is imposed, the more inelastic the demand of a good is, the more the buyer has to pay; the more elastic the demand of a good is, the more the seller has to pay. It is possible for the deadweight losses due to price shocks to increase or decrease when the indirect sales tax is imposed.
So, can the deadweight losses occurring due to political interventions also be influenced by direct tax compliance? If yes, then is it influenced positively or negatively? I think we can minimize the extent of deadweight losses by compliance to direct taxes, and reducing the dependence of the government on indirect taxes.
Alternatively, the government can also help in minimizing the deadweight loss by establishing a sustainable market regulatory framework where political instability does not affect the economy as much as it does now.
Also Read- Some much needed reforms (first part of the two-parts Op-Ed)
This means that the efficiency of governance should be improved in a manner in which macroeconomic shocks, if they are to happen, would not be or would be least affected by political scenario.
A closer examination of political integration on business cycles, business cycle fluctuations, and overall GDP growth can be useful in this case.
Training the young generation
Because of the immense potential of our nation’s huge demographic dividend and the hope of “catching up” with other developing countries due to the diminishing marginal product of capital, it is possible for the economy’s overall production function to show increasing returns to scale.
With the advancement in technology and trade, we can also ensure maximum utilization of our resources. This means, if human capital is trained for realizing tax compliance, it will be beneficial for the state’s economy and development in the long run.
Measures have already been taken to train young adults about tax compliance in schools, colleges, and universities. But shouldn’t we go ahead and make it a part of the general curriculum?
I believe awareness about tax compliance is as important as awareness about any other subject -- instilling a sense of responsibility in the minds of young children is better than dealing with irresponsible adults of the future.
Reinforcing the role of tax officials, legal practitioners, and independent consultants
If people deployed as tax officials and legal practitioners increase in quality and quantity, their original roles as tax compliance agents and collaborators can be reinforced. Independent tax consultants could also be welcomed in the overall compliance process.
It will be possible to form more disciplined organizational bodies and hence ensure better regulation of tax compliance in this way. Indirect warning systems and caveat information can also be dispersed early through these bodies.
Moreover, the zonal tax compliance process can also be eased further. If the bureaucracy itself is an active body to look up to, people will not hesitate to take leaps of faith by giving them the benefit of the doubt in terms of tax-revenue utilization.
Credit rating agencies as a medium of public-private partnership
Access to information has become both a blessing and a curse in the 21st century. While data is being used to justify authenticity, or store and update the records, it can also be manipulated for the worse. The privacy privilege of citizens can be violated in the tax compliance process.
It definitely hampers the public-private partnerships and business collaborations. I think the credit rating agencies can really lend out a helping hand in bridging the information gap as well as protecting personal data.
In this way, direct tax compliance can be increased through improved liaison of the government with private and autonomous credit-rating agencies. The CIB (credit information bureau) clearance process could also be eased through the intervention of these agencies.
Co-operation and collaboration from both ends
Last but not the least, I think it is extremely important for both the government and the citizens within the tax bracket to come together, co-operate, and collaborate in scaling down the revenue-GDP ratio by maximizing direct tax compliance.
The government should operate in ways where people’s confidence is being valued. Similarly, people should be confident in entrusting the government. After all, a good taxation system is ideally supposed to benefit them when they become senior citizens, through the amenities and services that become available to them.
Maisha Mehzabeen works at the Dhaka Tribune and is a graduate in economics.