Not the wealth tax, needed is horizontal expansion of existing tax net

The National Board of Revenue (NBR) has incorporated wealth tax in the draft of the Direct Tax Act 2011. Theoretically, it is justified to promote a progressive tax system, based on the ability-to-pay principle. Income plus asset is a better measurement of equity or ability to pay, rather than income alone. Moreover, the wealth tax is expected to generate additional tax revenue from the wealthy people and spending of which will reduce economic inequality. However, this journey to generating more revenue through vertical integration in the tax system is a complex issue for the government to reducing inequality in a country where tax evasion is fairly extensive. Initially, the wealth tax is planned to be imposed on houses, flats and lands in major cities to a limited extent. However, anyone who owns a single house, part of a house or a vacant plot not over 500 square meters are exempted from the proposed wealth tax. It also proposes to bring motor cars for private uses, jewellery made of precious metals, watch having a value in excess of Tk 50,000 and cash in hand in excess of Tk 200,000, under wealth tax net. However, the chairman of the NBR in a recent speech said that it would be limited to houses, flats and lands, meaning it would appear as property tax. The wealth tax is expected: to check the excessive purchase of land and house; to shift investment to productive sectors; to generate additional tax revenue; and to reduce the ever-widening inequality. The arguments against the property tax include: problem in valuations of properties; deepening the tax burden for the taxpayers; welfare distortion unlike other taxes; and rising burden on tax administration. This is to note that a tax system is more efficient than another if it raises tax revenue with smaller cost to taxpayers. Now the question is what will be the balance of benefits and costs from the proposed wealth tax. Huge investments are concentrated on lands, houses and flats as these are productive from an individual's perspective. The proposed tax may not limit the investment on housing and lands because of increasing demand and continuous price-hike. On the other hand, tax revenue to be generated from new tax may not be significant under the typical culture of tax evasion. The equity impact is dependent on the flow of collected tax from upper wealth stratum to lower wealth stratum. It is already reported as a sad reality that not even 60 per cent of budgetary allocation for social safety-net and poverty reduction programmes is used effectively. The expected benefit of this tax other than collecting revenue will remain unsatisfactory. It is observed that the complexity in tax payment procedure kept many people away from the tax net. Taxpayers are to hire tax lawyers or to pay bribes to solve tax problems because of the complexity in the tax system. The property tax will add to the complication associated with valuation of properties, identification of exemptions and calculation of the tax amount. The new tax will lead people to hiding properties that is visible in hiding incomes. This will raise black money in the economy. Moreover, any new tax will create burden on the tax officials who are to be lax in enforcement of the tax laws for limited institutional capacity. However, the majority of the people are likely to support wealth tax thinking that they will not fall under it. Notionally, the wealth tax is a direct tax; burden of the owners cannot be shifted to anyone. But real consequence of tax on property will shift the burden to tenants. When property tax is imposed, the house owners will increase the rent of houses. The rise in rent even might be higher than the tax amount under the existing state of considerable shortage of housing in the major cities. The incidence of the tax, in all probability, will create burden on the majority of city-dwellers, who live in rental houses. Meanwhile, a positive change in tax culture has come into sight because of gradual movement from complexity to simplicity. Introduction of self-assessment procedure, open-access rules, online tax calculator, online return submission, etc., are appreciated. People, earlier afraid of the tax system, are now going to the tax office. Practical example of which is the response of taxpayers to the Tax Fair. At a time when people are becoming somewhat comfortable about making payment of taxes, the wealth tax will only create additional fear. Notwithstanding all good intentions, the move towards introduction of wealth tax may turn an opportunity, to a threat to the nascent tax culture. The progress in tax collection is satisfactory in Bangladesh even with the tax revenue to gross domestic products (GDP) ratio of only 9.4 per cent. The country has made substantial progress in collection of tax revenue reflected from an average annual growth rate of 14 per cent during assessment year 2002-03 to 2010-11. However, the tax burden is still distributed among a limited number of taxpayers who submit tax returns. Any imposition of new tax will burden mainly the people who are already under the tax net. There are enough scope to collect tax under the existing tax system from the people who are evading taxes. Moreover, any introduction of a new tax will divert the tax officials to a new dimension that will slow down the initiatives to curbing tax evasion and the tax evaders will be safer. Institutional capacity of the NBR is crucial for vertical expansion of the tax net. The value added tax (VAT) is a major source of revenue accounting for about 35 per cent of the total. But there is deficiency of manpower to monitor the VAT system at the district level. Similarly, the customs department also contributes equally to the VAT but lacks manpower to do its job well. Moreover, the NBR suffers from inefficiency due to its corruption about which the finance minister himself acknowledged. Furthermore, the probable complexity from the wealth tax may add to corruption. Against this backdrop, the proposed wealth tax may keep the tax officials busy but with inefficiency. In this context, it would make a better sense on the part of the NBR to concentrate more on widening the existing tax net before taking additional administrative burdens. The horizontal expansion with simplicity under the existing tax net will keep bringing in potential taxpayers, will lighten the tax burden of existing taxpayers and will help augment tax revenue earnings in Bangladesh. The writer Dr. Aminul Islam Akand is Assistant Professor, Department of Economics, American International University -Bangladesh (AIUB), Dhaka. He can be reached at e-mail: akanda@aiub.edu