Rising income inequality in Bangladesh: The case for wealth tax

The rise of the gini-coefficient, a measure of income inequality, in Bangladesh over the years indicates that the income inequality is worsening. Income inequality and poverty are directly interrelated, as such even small changes in income distribution can have a profound effect on poverty. The general public is now better informed and aware of the issue than before.
In developed countries income inequality is primarily a matter of wage inequality. But in a country like Bangladesh there is an added factor - an all pervasive inequality of opportunities. Increasing social stratification based on various contesting interest groups and more importantly the rural-urban divide in the country are further exacerbating inequality of opportunities.
It is now widely believed that the pandemic is contributing to further widening of income inequality and increased levels of poverty in Bangladesh. The benefits of growth do no look like shared in any form or shape by the poor and very low wage earners like RMG workers even in this distressing time. According to the Bangladesh Institute of Development Studies 16.4 million have joined as new poor in the country due to Covid-19.
It is also a widely accepted view that all the growth of GDP - all the increases in national income, have accrued to the wealthiest 5 per cent of the population in Bangladesh, the remaining 95 per cent of the population hardly benefitted at all, in many cases their share has been shrinking. By 2015, the richest 5 per cent of the population were 121 times richer than the poorest 5 per cent. Now the Covid-19 pandemic is likely to further widen that gap.
The factors that helped to reduce income inequality in the decades from the early 1950s through to the late 1970s in developed countries may provide us with helpful hints on how to deal with the current crisis. But that does not seem to be on the agenda of the developing and poor countries as reflected in pushing through fiscal dumping to further boost profits which can further worsen income distribution.
More ominously in many developing countries the economic and political culture, corruption, associated erosion of democratic and accountable government led to policy making that goes against public interest. Such a policy orientation only creates an enabling environment for the wealthy to be able to concentrate ever-more wealth in their hands to the exclusion of the masses.
We start with the premise that taxes enable the capacity of the state to fulfil its responsibilities and they form one of the central arenas for conducting state-society relationship. Taxes also give the state its social character as the state shapes the balance between accumulation and redistribution. There has also been a long standing relationship between taxation and governance. It can also further be argued that the social contract between the state and its citizenry is based on trade-offs centred around taxation and public expenditure to foster representative democracy and enhances accountability between the state and its citizenry.
In Bangladesh, the reliance continues to be on consumption based taxes such as VAT, import duty and supplementary duty, accounting for about 60 per cent of tax revenue. In a country where one third of the population lives in extreme poverty and declining real wages both in rural and urban sectors and rising income inequality, such consumption based taxes with their regressive effects have serious implications for the fairness of the tax system.
Direct taxes constitute only about 30 per cent of total tax revenue, of which income tax accounts for a third (i.e. about 10 per ent of total tax revenue). Less than 2 per cent of the population pay income tax. According to the National Board of Revenue, there are 40 million people in the country capable of paying income tax but only 4 million are enlisted as income tax payers of which only about 60 per cent submit their tax returns indicating a very low compliance record.
In fact, over the last three decades or so, there has been an absurd concentration of wealth in Bangladesh. The effect of the rise in income inequality is increasingly leading to the concentration of wealth. If the wealth stashed away in Cayman Island, Lichtenstein and Panama ( The Panama papers do include names Bangladeshi citizens) and benami property (e.g. heba is one of the conduits for owning benami property) are included, the level of wealth concentration in Bangladesh would be even higher. In fact, the New York based research firm Wealth-X, 2019 showed that Bangladesh would record the third quickest growth in the number of high-net-worth individuals in the world in the next five years.
Furthermore, a consumption tax (VAT) exempts incomes generated through interest and dividend payments and also capital gains but an income based tax does not. Therefore, a consumption based tax (VAT) tends to create further income inequality. But income taxes as a share national tax revenue have been remarkably stable below 10 per cent over the last four decades. A tax system is based on progressive tax principles, the share of income tax revenue should increase as a greater share of income goes to people in the higher tax brackets. What is even more remarkable is the tax/GDP ratio in Bangladesh which stood at 9.3 per cent in 2018-19, much below the average for developing countries at 15 per cent.
Tax reforms over the last three decades have not changed anything much because the problems associated with the taxation regime in Bangladesh is systemic. More problematic is when direct taxation system which is marked by differential rates e.g., reduced corporate tax rate for banks and other financial institutions. The logic advanced is that this would reduce the lending rates thus stimulate investment. The bank lending rates are based on a variety of factors not on tax alone, in particular, factoring in the risk factor arising from loan defaults-- a phenomenon rather very widespread in Bangladesh. Such tax cuts only enable the rich for further accumulation of wealth. There is a saying that wealth begets wealth.
Now calls for direct tax increases are getting louder both in developed and developing countries. Also, questions are being raised about the fairness of income and wealth distribution even in societies like Bangladesh where historically societal view has been that some people are rich, others are poor and that's the way it is. In fact, extreme income and wealth inequality has long been a tragic fact of life in Bangladesh.
Now extreme income inequality is well recognised in Bangladesh (see HIES Report, 2016) but there is also a growing awareness that the country needs better and universal health care and education, social security, better roads, electricity supply and internet connection, especially in rural areas. To achieve these goals, Bangladesh needs honest, accountable and skilled public servants.
The tax system requires overhauling to raise the needed revenues to address the issue of rising income inequality and poverty. At the same time, the issue of extreme wealth inequality is also coming to the fore as an issue that needs to be addressed. The discourse on how to raise tax revenue now extends beyond calls to raise income tax for the rich to incorporate a wealth tax-- an annual tax on everything an individual owns. Certainly, the wealthy in the country will do everything possible to thwart it. But the issue of introducing a wealth tax forms the part of a conversation among the informed citizenry in Bangladesh and around the world and gaining popularity.
Thomas Piketty has spurred the renewed interest in wealth taxes. In his book "Capital in the Twenty First Century", Piketty claimed that rising income and wealth inequality posed a major crisis for advanced economies and proposed that countries impose annual wealth tax. There is a growing awareness that any reliance on income and consumption taxes alone is not going to adequately reverse the increasing concentration of wealth in the country. Therefore, the wealthy should be made to pay much; not only much at higher income tax rates but also on their wealth. This will also help Bangladesh to achieve a higher tax/GDP ratio which is much below the average for developing countries.
Wealth tax is a tax on the market value of owned wealth. This tax is applicable to a variety of asset types which include (but are not limited to) cash, bank deposits, shares, fixed assets, personal cars, assessed value real property, gifts, pension plans, money funds, owner occupied house and trusts. Wealth taxes remain a principal means for promoting social equity in a highly socially stratified society like Bangladesh by reducing disparities of wealth holdings.
Rising income and wealth inequality is a source of social and political discontent and can pose a serious challenge to economic growth potential. We have already seen how economic grievances of the poor arising out of rising income and wealth inequality have been exploited to capture political power by the far right in the USA. That has now tremendously embolden politicians of the extreme far right vying to capture political power in various European countries. In fact, Hungary and Poland are already under such a regime. In fact, Bangladesh itself has been living since 2014 with a far right Hindu supremacist government in neighbouring India who panders to the very rich of the country and peddles in bigotry, yet commands popular support.
Social spending in Bangladesh remains the lowest among seven South Asian countries at 0.7 per cent of GDP compared to Sri Lanka's 5.2 per cent (FE, October 18). A well crafted taxation regime including tax on wealth and transfer policies can achieve both income and wealth redistribution and economic growth enabling the country to mitigate to a great extent the grotesque imbalance between rich and poor.
Also, to address the issue of income inequality and poverty effectively, it is required to address the underlying inequities of opportunities. That will entail public investment in broadening the opportunities for skill development and learning and also public investment in a universal healthcare and education system. Above all, labour laws ensuring safe working conditions, a minimum living wage and collective bargaining rights will significantly improve income redistribution. In essence, economic growth in Bangladesh must ensure the provision of high quality public goods and that calls for overhauling the taxation regime with a high degree of progressivity in income and wealth taxes.
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