Taxing the working class and saving the corrupt

Have the cake and eat it, too: This may be a hackneyed phrase. But it is an apt idiom to describe a desperate Sri Lankan government’s haphazard fiscal measures to shore up falling state revenues and maintain a modicum of normalcy to keep the economy on life support. 

One such move is to add more tax burdens on the poor and the working class people. They are being excessively battered by the economic crisis and government measures to mitigate it. 
The country has a tax disequilibrium with 82 percent of the tax revenue coming from indirect taxes and about 18 percent from direct taxes such as personal and corporate income tax and Pay-As-You-Earn tax (PAYE). 

The massive gap between indirect and direct taxes, on the one hand, highlights the discriminatory nature of the state’s tax policy and, on the other, exposes the economic mismanagement of the governments since Independence and their failure to rectify the tax injustice imposed on the poor. Any welfare state works on the Robin Hood principle of robbing the rich to give to the poor. But in Sri Lanka, the governments have been taxing or robbing the poor to feed the rich.

Take, for example, the purchase of a tube of toothpaste priced at Rs. 200. If the indirect tax component in the price is Rs. 100, it will be a bigger percentage burden for the man whose daily income is Rs. 1000. He pays ten percent of his daily income as the indirect tax. On the other hand, a doctor earning Rs. 100,000 a day – charging Rs. 2,000 from 50 patients -- pays 0.1 percent of his daily income as indirect tax when he buys the same product. So indirect taxes tax the poor and the working class people disproportionately and are discriminatory.

Just like the man with the proverbial cake, the government cannot tax the poor and protect the poor from economic hardships at the same time.
A welfare government requires revenue to offer subsidies to the poor, pay public servants their salaries, provide for the health, education, and other basic needs of the citizens, improve infrastructure facilities, fortify the state’s security, maintain diplomatic relations, and meet other expenditures. 

But the policy of the present Sri Lankan government is not of a welfare state. It is not compassionate enough to the poor and the disappearing middle class. This was seen in the manner in which the government defended the move to impose another shocking electricity tariff hike and went ahead with a new tax structure that severely hurts the middle-income group. The tax base of Rs. 100,000 monthly income or Rs. 1.2 million annual income is atrocious, if not, a vulgar disregard for the plight of the poor, especially the working class. 
The government’s argument is if it does not raise the revenue through taxes, the alternative is to print money, a move that will shoot up inflation and hit the poor and the working class people more than the rich.

The government claims that it decided on the base after studying several options. But it has not shared with the people the details of the study – whether it took into consideration the social disintegration that would ensue in burdening the working class. Given the hyperinflation the country has been experiencing for the past one year, the despondent working-class people are in a struggle to make ends meet with their monthly salary of now taxable Rs. 100,000 or thereabouts. It is impossible for a family of four to survive on Rs. 100,000 a month, spending on food, medicine, transport, school and tuition fees, rent, fuel, clothes, and other essential expenditures.

It appears that little does the government realise that its policy of adding more tax burdens on the poor and the working class has only given a turbo effect to the dark-street economy.
Sad to say, the dark-street economy seems to be booming with poverty pushing more women to work in the sex industry, more youths to work as drug peddlers, and more public sector officials to become corrupt, while the police appear to be unable to cope with rising robberies and the soaring crime rate.
The heavy tax burden on the working class will only accelerate the disintegration of society. When poverty comes in at the door, morality flies out of the window.

The trickling down of economic benefits from the middle-income groups to the lower strata will be further curtailed with the middle-income people adopting an austere lifestyle to make up for the income loss due to new taxation. For instance, they would curb travel by tuk-tuk and avoid buying meals from vendors. This would deal a severe blow to the lower-strata economy. 
The sum effect of the additional tax burden on the working class may even trigger a second wave of Aragalaya – street protests. 
The authorities would do well to remember that they need to take urgent countermeasures not to avert the coming Aragalaya but to prevent the social disintegration from taking the country towards dystopia. 

Corruption and tax

Is taxing the poor and the working class the only way to fill the state coffers? What about an end to corruption? The country has lost billions of rupees, nay dollars, due to unchecked corruption. While the people are undergoing untold suffering due to the economic crisis, politicians do not seem to have realised that it is time to make the supreme sacrifice expected of them -- deferring their indulgence in corruption at least until such time that the economy is fat enough to rob.

As the IMF has noted in a 2019 report titled ‘The Cost of Corruption’, corruption can have a profoundly detrimental effect on public finances with corrupt politicians and officials overpaying for goods and services or investment projects from hard-earned tax revenues and then pocketing big commissions. 

Noting that revenue collection is higher in less corrupt countries, the report cites Georgia as a positive example. 
In Georgia, in 2003 a new government launched an aggressive campaign to reduce corruption from very high levels. The result: tax revenue jumped from 12 percent to 25 percent of GDP in five years, even as tax rates were lowered.

“Georgia’s success reflected a new culture of tax compliance: the share of people who felt it was never justifiable to cheat jumped from about 50 percent to almost 80 percent. Improvements in services, including lower crime rates and fewer power outages, and renewed trust in government made people more willing to pay taxes. Higher revenue also made it possible to clear wage and pension arrears, further bolstering confidence in the government.”

Sri Lanka, placed in the 102nd ignominious position in Transparency International’s 2022 Corruption Index, shows no urgency to increase state revenue by eliminating corruption.
In November last year, delivering his budget speech, President Ranil Wickremesinghe had the cheek to say his government would not act now to bring the corrupt to justice when the priority was to put the economy on the right track. Needless to say, the presidential truce in the anti-corruption war, has only allowed the corrupt to regroup and re-rob the country if recent allegations surrounding deals on medicinal drugs and coal purchases are true.