Social security tax alone is 9.1 per cent (total tax is 33.5 per cent) of gross domestic product (GDP) in Organisation for Economic Cooperation and Development (OECD) countries and increasing over time. It was 7.4 per cent in 1990 and 9.0 per cent in 2015. In terms of total revenue, this is 26 per cent. The figure is 24 per cent in the USA (2017).
That there is an important and significant tax called social security tax around the world is largely unknown in Bangladesh. There is not a single textbook on taxation in Bangladesh which has a chapter on this tax. Also, there is no university where any taxation course has social security tax as a separate chapter in the syllabus. Not only in Bangladesh, elsewhere particularly in Asia, social security tax has not yet been considered as the mainstream tax like personal income tax, corporate profit tax, value added tax (VAT) and customs tax. This tax is rather known as 'social security contribution' and 'social security benefit'.
In Bangladesh, social security is considered as a benefit received free from the government. In reality, proper social security benefit is not free rather self-financed or contributory across the world. Recently, in other South-East Asian countries also this social security tax and benefit is gradually being understood and taken as contributory and same like the other traditional taxes.
Europe has the highest social security tax for its social security benefits. In Germany, employees and employers each pay 9.0 per cent of employee salary for old age, disability insurance and survivor allowance (OASDI), 7.3 per cent each for health insurance, 1.28 per cent each for nursing care for children and another 1.5 per cent each for unemployment benefits. Additional social security contributions are insolvency fund levy 0.12 per cent, maternity levy 0.38 per cent to 0.51 per cent for compensating employers for salary payments during maternity period, sickness levy 1.1 to 3.95 per cent for compensating employers for salary payments during employee sickness. Other European countries have similar social security system financed by the beneficiaries themselves and government subsidies. In the USA, social security tax is called payroll tax (FICA for Federal Insurance Contributions Act and SECA for Self-employed Contributions Act). Employees and employers each pay 6.2 per cent of salaries, self-employed pay 12.4 per cent, another 1.45 per cent each for medicare.
Government subsidies for social security are available only for the low-income people. In Germany, rich persons earning more than Euro57600 go for private insurance. This cap is $128400 in the USA and INR180000 in India a year. Employee and employer contributions are not sufficient and therefore government subsidises the benefits.
Self-employed high income earners pay slightly higher than employed persons. In France, the tax is 13 to 25 per cent of turnover and in some cases 45 per cent of profit. In Germany low income earners can take insurance by paying as low as Euro160 a month. They can also take state-funded schemes by paying 19 per cent of earnings.
It is true that countries with GDP per capita even lower than Bangladesh's have mandatory contributory social security system. About 39 countries, mostly in Africa, have GDP per capita lower than Bangladesh. These countries have an average social security contribution of 3.0 per cent of salary from both the employer and the employee. The employee's contribution is 5.0 per cent in Ghana, Senegal, Uganda, Sierra Leone, and Niger; 10 per cent in Tanzania, 8.0 per cent in South Sudan, and 7.0 per cent in Ethiopia. The employer's contribution is much higher. Social security tax as a percentage of total tax revenue is 5.0 per cent in Senegal, 5.8 per cent in Cameroon, and 4.7 per cent in Niger in 2015 (OECD stat).
In the least developed countries (LDCs), free third-tier pension for old aged poor citizens do not work. Bangladesh has this noncontributory free social security system. These benefits are not good even for survival -- $5.0 pension a month for the poor. In Nepal, however, social security benefits of $9.7 per month for widows and marginalised citizens are financed by social security tax @1.0 per cent on the first NR250000 of personal income.
Average corporate profit tax rate in Europe is 20.5 per cent. Companies also pay an average of 6.4 per cent of profit as social security tax which makes a total corporate tax of 26.9 per cent. In Germany, corporate profit tax is 29.8 per cent and corporate social security tax is 12.8 per cent of profit that makes a total corporate tax rate of 42.6 per cent. In France, corporate profit tax is 33 per cent and social security tax is 22.8 per cent of profit which makes a total corporate tax of 55.8 per cent.
In china, employees pay 8.0 per cent for old age, 2.0 per cent for medical and 1.0 per cent for unemployment, a total of 11 per cent and employer pays 20, 8.0 and 2.0 per cent respectively and another 1.0 per cent each for occupational injury and maternity-- a total of 32 per cent. In India, Employees Provident Fund and Miscellaneous Provision Act 1952 requires 12 per cent contribution from employer and employee each. Similar social security system exists in Sri Lanka, Vietnam and the Philippines. In Indonesia and Thailand, the contribution rates are lower. Mandatory pension cover more than 20 per cent of labour force in Thailand, the Philippines, Sri Lanka and Vietnam.
There is no government regulated pension or provident fund in the private sector, except in the tea plantation and newspapers industries. Some established private institutions, particularly in the urban areas, provide contributory provident fund. Bangladesh Bureau of Statistics Survey of Manufacturing Industries (2012) shows an average of only 0.44 per cent of total employment cost as social security contributions. Even 38 per cent of 280 Dhaka Stock Exchange listed companies do not have contributory provident fund scheme.
These limited data suggest that social security tax (in terms of contribution) is rare. Time has come for a mandatory social security scheme like in India and Nepal where we can start with a small amount of contribution of say 1.0 per cent of earnings a month each from the employee, employer and the self-employed to be administered centrally by a trust like in other countries.
Dr Dhiman Chowdhury is Professor of Accounting, Dhaka University. [email protected]
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