Bangladesh has been maintaining a progressive income-tax regime for quite a long period. Such type of taxation is practiced in many countries --- stretching from developing to advanced nations --- with the objective of reducing the gap between the poor and the rich in terms of income. Income equalities make society stronger.
Our taxation system is based on the theorem of "ability to pay", and link with the principle of the taxation, progressive tax rate is nothing but increasing taxable amount with increased earnings of the taxpayers.' The increased collection by the tax authority is meant for redistributing the resources to the poor through different mechanisms. The widely used mechanism consists of the widening of education, healthcare facilities and social safety-net programmes.
Despite the long --- practiced taxation system, none can claim that the income inequality between the poor and the rich in the country has dropped significantly. It is observed that the inequality remained just middle of the scale that measures the inequality. In some surveys, this is widened but never goes to the higher end of the scale.
In economics, the Gini Co-efficient is the most-used indicator of income inequality in society. The "0" [zero] on the Gini scale indicates no concentration of wealth while "1.0" [one] indicates higher concentration of the same. The indicator in the latest HIES report is nearly 0.5 in the urban areas, up by 0.046 percentage point from its earlier survey conducted in 2010. This is probably the highest so far I can recall. The other --- national and rural parts also increased in the latest statistics of the HIES. So the main goal of such taxation in Bangladesh has yet to come to fruition.
The latest report on the Household Income Expenditure Survey (HIES-2016) reads: the extent of concentration of household income remained with higher-household income group.
The government who distributes the resources to the poor from the revenue budget has allocated huge wealth for implementing many pro-poor activities in the country since 2005 apart from other allocations for education, healthcare and other programmes.
However, a major part of the government allocations goes for the Social Safety Net Programmes (SSNP) which is equivalent to around 12 per cent of the GDP. It is believed that such programmes help alleviate poverty and empower the poor. It is generally meant for the poor.
According to the HIES 2016 estimates (cost of basic needs method) using the upper poverty line 24.3 per cent people are poor, and using the lower poverty line, 12.9 per cent people are extreme poor. Most of the extreme poor suffer from chronic poverty. Most of them live on charity or below subsistence level. Therefore, Government operates SSNP to support this kind of families in cash or kind to make provision to overcome hunger. It also fails to achieve its goal in many cases. Many argue that the poverty rate has dropped significantly from nearly 60 per cent since early 1990s.
The SSNP module was first introduced in the HIES 2005 where 11 programmes were included. But, in HIES 2010 its scope is widened to include 30 programmes and further extended to 37 programmes in 2016.
All types of revenues have been growing. The share of income tax in total tax collections in five years since fiscal year 2013 on average is over 35 per cent. This is the second-highest share of all tax segments. Value-added tax (VAT) has had the highest share of over 35 per cent in five years to June 2017. The average growth in direct and indirect taxes has been over 14 per cent in five years under review.
This article is to explore the reasons behind the failure of the goal of such progressive taxation. This is not econometric analysis. This is just some "third-eye" version of the author depending on some assumptions.
The assumptions are: the economy is expanding, income tax is increasing despite the fact it is still much lower than in other developing nations in terms of its share in the GDP, there are a number of social safety-net programme, the poverty rate is dropping.
Reasons: The first reason to the author's mind is that the government is not allocating right resources to the right people in right time. The government allocates adequate amount of resources in budgets for the poor through different mechanisms and this is equivalent to around 12 per cent of the gross domestic product (GDP). What are their reflections in society?
The other reason is the way the government implementing different pro-poor strategies is not effective and efficient. The government usually distributes the resources through local governments and the elected representatives at the union level. They may reach the wrong group of people or are forced to do so or they themselves may be involved in corruption.
Another reason is that the government is not getting its expected level of revenues from the rich people which they somehow manage. If government fails to mobilise higher resources, then how it will allocate higher resources (?) for the poor. If the government gets much money and can spend for different infrastructures like schools, hospitals, shelters, and other vocational training centres which also help empower the people financially. There are some rich countries which usually mobilize higher resources and their budget remains in the surplus. They can do whatever they. But our government earns less than the budget size and fills the gap by borrowing.
An important reason is probably existence of a trade-off between the government employees and the social safety-net programmes. The former is organised and powerful so they avail of a large share of the revenues through allowances, salary hikes and other fringe benefits.
It is true that none advocates allocation for the social safety-net programmes. There are some NGOs who often work for the poor but they remain mum while they negotiate with the government on the allocation and its effective disbursement and monitoring.
Next may be the indirect taxes like the VAT that help increase tax burden on the poor, leading to the worsening of the situation of the bottom group of people. This needs to be examined properly.
There may be a question: Is Bangladesh only country which failed to reduce the poverty gap amid the long practice of the progressive tax? No. This is not true. The other major countries facing the same situation are South Africa, China and India. Bangladesh has some improvements on inequality in HIES 2005, though not that significant.
Fresh concern: The forced displacement of the Rohingya people from Myanmar and their influx into Bangladesh has given rise to a grave situation for the country with potentially serious consequences from a number of dimensions, including pressure on the revenue budget. If there is no improvement on the Rohingya issue about their return to their country, then revenue budget will face serious pressures leading to the worsening of further income inequality.
What the government and others now can do: Bangladesh is such a country where the rich are greedy in terms of getting government assistance. The rich can influence the local representatives and officials concerned and they are the beneficiaries of the SSNPs. For this reason, a poverty database is critically important to distinguishing between the poor and the rich. The World Bank funded a project for conducting a census on the measurement of the poor. But the way the project proceeded there is enough reason to think that the census output will be "poor." So there is a need for quality data on the poverty level of the country.
The indirect taxes, especially the value-added tax, imposed since the early 1990s has generated many controversies not only for its higher rates but also for being charged for almost all products and services. This is impacting the poor as it erodes their real income. So there is need for adequate researches as to whether it impacts the poor. Implementation of the much-talked-about and much-delayed VAT ACT-2012 may be a solution.
The Competition Commission formed nearly five years back should act to ensure a level playing field for all as currently a few groups are concentrating the businesses. A leading group does every business from agro-processing to high-end industrial products, even manufacturing sweets. There is no bar in a competitive era to doing all sorts of business by a single entity. But there is need for some restriction on creating entrepreneurships. This may be promoting the new business and new creative products so that the big ones cannot cash in on the products or services invented by the new entrepreneurs.
And the most important is that the revenue expenditure should be allocated on the basis of accurate estimation. It is now urgent to put income-tax reform at the top of the policy agenda.
Conclusion: There are many challenges against reforming the tax regime especially in terms of earning more revenues from the rich. And distributing the same for the poor also is challenging in a corrupt system where bribery and corruption is a common practice. So this is definitely a formidable democratic challenge to create an equitable society in terms of incomes.
The writer is Special Correspondent of The Financial Express.
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