Home ›› 03 Jul 2022 ›› Editorial
The resource distribution pattern and the trend among the various stakeholders in national budgets over three to four decades determine the range of inequality in society. Here, the per capita income of a country may not be appropriate in determining the standard of living of a country when the growth of an economy fails to address the distribution with employment generation.
The per capita GDP for the fiscal year 2022-23 in Bangladesh is projected to be USD 3,007 in the budget in comparison to the per capita GDP of USD 2,824 in the fiscal year 2021-22. A country’s GDP is divided by the total population in calculating the GDP per capita and thus it is a deceptive figure as this misrepresents the vital question of the distribution of income. The inequality in income is measured through the Gini coefficient with a value ranging from 0 to 1. Thus a value closer to 1 manifests extreme inequality. It is more important to compile size income distribution data that helps to draw the Lorenz curve and trace the extent of difference between the line of even distribution designated by the 45-degree equality line with the Lorenz curve. Thus, mere growth cannot ensure the fair distribution of income unless the overall economic policies are tilted toward redistribution. This is observed in the development histories of many countries that are experiencing inequalities in the midst of amazing growth. Bangladesh is not an exception.
The value of the Gini Coefficient in Bangladesh was 0.27 in 1972, 0.28 in 1990, 0.46 in 2010, 0.50 in 2015, and 0.52 in 2020. The Household Income Expenditure Survey’s [ HIES 2016] top decile 50 percent owns about 80 percent of the GDP, and the rest of 20 percent is owned by the bottom 50 percent. The top decile of the population owns 36 percent of the GDP and the bottom decile owns 2 per cent of the GDP. The data on the decile distribution of income and the incremental value of the Gini coefficient divulge that historically the budget failed to address the question of equity through appropriate and pragmatic policies on distribution.
There are four features relevant to this inequality issue. First; the income tax exemption level of the marginal taxpayer and the investment rebate; whether it favors the richer section of the community at the cost of the marginal taxpayer. Secondly, designing a pragmatic tax slab i.e., progressive by nature instead of the regressive. Thirdly, the various distributional issues in the budget and the modus operandi of these distribution policies. This relates to the allocation in the health, education, and social safety net programme.
A review of the budget formulation and implementation process indicates that the authority failed to formulate concrete policy tools on two very important aspects; the tax-exemption level of income and the investment rebate arithmetic. It appears that the method is not based on sound fundamentals. The justification for keeping Tk. 3,00,000 as the tax-exemption level of income during Financial Year 2022-23 as a way to increase the tax-net hurts the marginal taxpayer. The galloping inflation erodes the purchasing capacity of many households and sticking to the exemption level of Tk 3,00,000 would definitely worsen the quality of life of the marginal taxpayers. Again, each year we see different percentage rules in the calculation of investment rebates. However, a fixed rule for all the year is more pragmatic from the viewpoint of a taxpayer as he can forecast the ultimate tax burden with accuracy. Indeed, the change of percentage for FY23 and the ceiling enlargement for certain allowances favour the richer segments of society.
The current income tax exemption level in India is Rs. 2.5 lakh. The USA has a unique system in which those taxpayers whose income is below the average income and depending on tax-filing status and the number of children get back all their deposited tax money as Earned Income Credit. For the Tax year 2021, the earned income credit ranged from $ 1,502 to $ 6,728 per person in the US.
The tax slab is limited to only a few tiers. The highest income tax slab is 25 per cent. Indeed, it was encouraging to introduce the 5 percent slab during FY22 but instead of the Tk. 1,00,000, the income level could be set in the range of Tk. 2,00,000 to Tk.3,00,000. This could work as an incentive for an automatic increase in the tax net. The 25 per cent tax slab may be applicable for the taxpayers whose income exceeds Tk. 20,00,000 instead of the current Tk. 16,50,000. The authority may introduce three other slabs such as 30 per cent, 35 per cent, and 40 per cent not to penalize the higher income group but to generate revenues that could render a progressive tax structure.
The highest tax slab in China is 45 per cent and in India, it is 30 per cent. There are several federal income tax rates in the USA: 10 per cent, 12 per cent, 22 per cent, 24 per cent, 32 per cent, 35 per cent, and 37 per cent. Bangladesh tax slab rate could be developed in an incremental way but with spikes as we observed between 12 per cent and 22 per cent and 24 per cent to 32 per cent.
The structure of taxes; direct versus indirect taxes is a contributory factor in the inequality syndrome. Direct taxes are more progressive but constitute about 33 percent (including profit tax) in Bangladesh which is below the 38 per cent average in Asia and the Pacific. The share of OECD countries in direct taxes is about 60 per cent. Income tax is the main source of revenue among the various devices of direct tax. Though income tax is imposed on the criterion of ability to pay,
“The more a taxpayer earns the more he should pay” is the motto. However, it is not strictly progressive by nature in Bangladesh. Personal Income Taxes (PIT) in Bangladesh constitutes about 2 per cent of the GDP, and the share in OECD countries is about 10 per cent. Vat is the largest source of tax revenue constituting about 40 per cent of the total tax revenue.
The recent debate on increasing inequality and wealth concentration both from a domestic and global perspective warrants greater use of income and wealth taxes for redistribution. Wealth concentration manifests a continuing trend and thus requires more proactive use of income and wealth taxes in smoothing income distribution. Meanwhile, higher public spending on education, capacity building, and social protection are required on equity grounds, as an investment in these sectors works as a catalyst for productivity enhancement. Unfortunately, the allocation in education as a percentage of GDP is below the standard markup of 2 percent of GDP, and allocation in health is only marginally 1 percent of GDP below the average healthcare expenditure of 2.3 percent of their GDP as per the report of the World Health Organization. Unfortunately, Bangladesh lacks funding for pro-poor public spending.
The long-term strategies for promoting equality and equity depend on three pillars; raising the share of direct taxes in the overall tax structure, eliminating distortive loopholes, and more proactively leveraging personal income taxes and wealth tax to check extremely high income and wealth concentration and finally a check on corporate income tax loopholes.
The writer is the Treasurer and a Professor at the School of Business and Economics, United International University. He can be contacted at obaidur@ eco.uiu.ac.bd
