TAX, FISCAL POLICIES: Not inclusive enough

Tax and fiscal policies framed and applied by the government are not progressive enough to reduce inequality in the society, said analysts.

Various exemptions and rebates, tax privileges given to different influential quarters, high dependence on indirect taxes and inadequate public investment in health, education as well as other social sectors never help the government achieve inclusive economic growth, five noted economists told this newspaper.

The observation came when inequality has hit all-time high, raising questions about the quality of the country’s much-lauded stellar economic growth, which is estimated to be 8.13 percent by this fiscal year.

Official data show that Bangladesh recorded more than 6.5 percent GDP growth in the past decade. Yet inequality, in Gini coefficient or Gini index, rose to .482 in 2016, up from 0.458 in 2010, in a worrying development.

The Gini coefficient is measured on a scale of 0 to 1; the closer it is to 1 the higher the inequality is in the society.

At the same time, the pace of reduction of poverty has fallen, according to the latest Household Income and Expenditure Survey (HIES) of Bangladesh Bureau of Statistics (BBS).

The economists said tax and fiscal policies have a lot to do in addressing the inequality in society.

Debapriya Bhattacharya, distinguished fellow of the Centre for Policy Dialogue (CPD), said a number of features of Bangladesh’s fiscal policy actually fosters the macroeconomic determinants that affect the employment growth and income opportunities in the country.

“This, in turn, is inhibiting the country’s transition towards economic inclusiveness,” he said.

“Our analysis shows large- and medium-scale manufacturing industries have been significant contributors in the recent GDP growth. However, their growth has originated from enhanced productivity, rather than increased employability. So, the growth could not actually benefit a large section of the population, whose income level did not rise.”

Moreover, Debapriya said, the SMEs and micro industries, which are more labour-intensive in nature, did not post growth as much their larger counterparts achieved.

Zahid Hussain, lead economist at the World Bank’s Dhaka office, said tax policy is one of the most important aspects of a country’s business environment and the distribution of income and wealth.

“It incentivises investment, corrects large inequities in the distribution of income and wealth and generates the revenue needed to fund essential public goods,” he said.

According to Zahid, one of the basic concepts of designing and implementing an equitable taxation system is to spread the taxes as wide as possible to minimise the individual tax burden. 

And direct tax, which is linked to the taxpayer’s ability to pay, and hence are considered to be more progressive, he said.

Yet, indirect tax, which is paid by everyone regardless of financial situation to buy goods and services, is used by the tax authorities to generate revenue. Over 68 percent of the total tax in Bangladesh came from indirect taxes in fiscal year 2017-18, he said. 

“Indirect taxation imposes a greater relative burden on the poor than on the rich.”

Debapriya Bhattacharya said the share of direct taxes covers only a quarter of the total revenue collection, and it has somewhat stagnated in the recent past.

“It essentially means that the government continues to depend more on indirect tax, which has negative implications for distributive justice.”

ABSENCE OF WEALTH TAX

Zahid Hussain said despite having structured a mechanism of progressive personal income taxation, various exemptions and rebates, which only the better off can take advantage of, dilute its actual progressivity.  

“Broadening the income tax base by eliminating special treatments would improve the horizontal equity of the tax.”

Moreover, he said, Bangladesh still lacks a systematic mechanism and efforts for wealth tax assessment.

“There are provisions of imposing a 10 percent surcharge on net wealth, but complexities in determining the price of assets and taxes, combined with governance weaknesses, have severely limited the revenue yields and progressivity of the net wealth surcharge.”

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said income tax rates are progressive. “But applications are selective, and also a lot of things are not covered.”

Debapriya Bhattacharya said research suggests that the prevalent high-level of inequality cannot be tackled by imposing tax on the current income alone; stock of assets needs to be brought under the tax net as well.

“Other than introduction of nominal surcharge on historical value of assets, no measure has been observed in the recent past, in this respect. It is time that we consider introduction of inheritance tax.”

“In the recent past,” he added, “we have also seen that the government keeps providing arbitrary special exemptions to influential quarters without analysing its overall impact of such measures; this reduces the effectiveness of revenue efforts.”

KAS Murshid, director general of Bangladesh Institute of Development Studies (BIDS), said Bangladesh’s direct taxation is progressive to some extent but relatively less tax comes from influential and economically affluent people.

“It appears that those who are supposed to contribute higher amount of tax, are not contributing to that extent. Instead, we see lobbying to get tax benefits by those who are supposed to pay higher. We know who do this,” he said.

“From casual political economic analysis, it seems that power of special interest groups has increased a lot.”

He said taxation system should be more progressive and the government should pay more attention to the needs of small, marginal farmers and the poor.

“This is especially important because of the rising inequality and lack of voice of the disadvantaged,” said Murshid.

INADEQUATE ALLOCATION TO FIGHT INEQUALITY

Selim Raihan, executive director of South Asian Network on Economic Modelling (SANEM), said a large number of potential taxpayers, including many ultra-rich people, have remained outside the tax net.

“This has resulted in a tax system which is regressive, and inequality is rising,” he said, adding that economic growth since 2010 has benefited the rich more.

“A number of reasons can be mentioned as responsible for the rise in inequality. However, fiscal policy during this period can be considered as one of the major contributing factors.”

He said one of the major instruments for the government to address inequality is public expenditure in social sectors. However, this has not been prudently used, added Raihan.

CPD’s Debapriya said, “Allocations in health and education sectors have remained abysmally low in our country over some time now.”

He added that the share of health and education budget is only around 1 percent and around 2 percent of GDP.

“It is well known that a resultative approach towards inequality reduction can be forged only when the access to quality education and health services for the society’s farthest behind people will be ensured.”

The other issues that warrants concrete measures for reducing inequality in the country are prevention of institutionalised corruption, public resource leakages and illegal capital flight, he said.