Should we try to understand ‘The Tax Paradox’? | Sunday Observer

Should we try to understand ‘The Tax Paradox’?

12 February, 2023

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now. Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.” – John F. Kennedy


Unless we can find a better method, taxation is the only practical means of raising the revenue to finance Government spending on the goods and services we demand as a country. However, setting up an efficient and fair tax system while trying to be a part of the global economy, is not a simple task, especially for a developing country like Sri Lanka. An ideal system should raise essential revenue without mandating excessive Government borrowing while staying close to tax systems of other similar countries and encouraging economic activities.

There are people who usually do not get into the tax base. One such group is employed in agriculture or in small informal enterprises where most of the transactions, including wages, are done in cash (‘off the books’). It is hard to even define a proper tax base to include them. Another is the group of entrepreneurs who are involved in illegal businesses which includes corrupt politicians also in most of the countries.

As Al Capone, the famous bootlegger/mobster from Chicago, once said: “They can’t collect legal taxes from illegal money”. Hollywood movie ‘The Untouchables’ (1987), though may not be 100 percent accurate, was based on the book by the same name that explained real events that led to the arrest of Al Capone in the 1930s, shows how corrupt Chicago police, the Bureau of Prohibition agents and the tax collectors were at the time.

The group consisting of the few Government officials who couldn’t be bought by Capone’s money became known as ‘untouchables’ and they were able to put Capone behind bars at the end.

Yet another group of tax evaders consists of individuals and big businesses who can afford expensive ‘tax consultants’ capable of using all the loopholes in the tax code, including offshore harbouring, in order to avoid paying their fair share of taxes.

Black money

There are countries known as ‘tax havens’ facilitating all different types of tax evaders around the world. Documents such as Panama Papers or Pandora Papers revealed some of those tax evaders and countries that facilitate the services they need to hide their black money.

The Cayman Islands, Bermuda, The Netherlands, The Bahamas, Seychelles, and Switzerland are some of the most popular tax havens in the world. We shouldn’t be surprised if some individuals or corporations from Sri Lanka were also found to be beneficiaries of the generosity of such tax havens. As a result, governments often take the path of least resistance, introducing tax systems that allow them exploit the wage earners in the State and the private sectors whose earnings and expenses are recorded in several places including the Inland Revenue Service (IRS).

Majority of this group is spread through lower to upper range of the middle class who have adjusted their lifestyle according to the fixed income they get in regular intervals during the year. They will have no other choice than to fight if and when a larger portion of such a fixed income is suddenly taxed while their housing loans, car loans, and payments for their children’s education and other expenses have been planned for the next ten to fifteen years, according to the previous tax requirements. They would still be willing to tighten their belts and be patient if they knew that the Government will be spending their money wisely for the benefit of the country.

Another myth about tax, mainly created by the rich and powerful, is that it is a system through which the Government takes from the rich and provides all types of welfare for the poor, discouraging the poor from becoming tax payers themselves.

Most of the people in countries like Sri Lanka point their fingers at free education, free healthcare, and welfare programs such as ‘Samurdhi’ as reasons for the taxes and the rich do not benefit from any of those programs. Not only such programs as free education, healthcare and Samurdhi-like welfare payments are needed to support people from the bottom of the economic ranks to low and middle income families, but also in the process of maintaining the customer base for the products and services the rich is manufacturing and selling.

That is why even IMF encourages such welfare programs especially in developing countries. These programs are also initial necessities essential in the efforts of reducing poverty in developing countries. Even if the rich does not experience any direct benefit from these welfare programs, indirectly they benefit through such support structures that sustain and expand the middle class which often is the much needed customer base and the workforce that generates the income for the rich.

Import-export businesses will find it very difficult to function if the country’s customs services, seaports and airports, international trade regulatory bodies are not functioning efficiently. Even if you ride in your limousine you still have to sit in traffic created by ordinary people who can’t afford to live near where they work.

Limousine ride

Fly in your private jet, if your Government doesn’t have enough funds, then you will still be dependent on archaic, under-funded systems of air traffic control. If there is an efficient public transport system, then that will reduce the road congestion allowing the rich to enjoy a smooth limousine ride. Quality and sustainability of such services are directly related to the amount of State funds (tax money) spent on them in using qualified workforce and latest technologies. No matter how much money one has if the country did not maintain law and order and if the judicial system is not functioning properly then there won’t be any income generation for the rich.

Maintaining law and order and national security needs tax money. Though these are just a few examples there are a whole lot of other ways for the rich to harvest the benefits of the tax they pay.

It may not be that difficult to understand how each and every one, irrespective of their financial status, can benefit from the tax they pay within an efficient and fair system of taxation.

There has never been a better time for Sri Lankans to think about and evaluate deeply what has happened and what will happen to their tax money. One of the main reasons why the country is where it is today is the lack of involvement by the taxpayer in the process of spending that money by the Government.

Some people who are not wage earners think that they do not have to worry about increased taxes since they do not pay any kind of direct tax. But they too are paying all types of indirect taxes. Increasing the Government revenue is an immediate need in the recovery process irrespective of the reasons for this crisis and who is in control of the Government.

A tax increase is inevitable. Therefore, citizens should demand the Government to go after the tax evaders and make them pay their fair share while guaranteeing a hundred percent transparency to see where the tax money is going. It is also the responsibility of each and every citizen to be vigilant and do all they can to stop politicians and/or corrupt officials from stealing tax money from Government coffers. Increased taxes will not do any good to the country unless we stop corruption and reduce wastage.

“Everyone can enjoy a life of luxurious leisure if the machine-produced wealth is shared, or most people can end up miserably poor if the machine-owners successfully lobby against wealth redistribution.” – Stephen Hawking

The writer has served in the higher education sector as an academic for over twenty years in the USA and sixteen years in Sri Lanka and he can be contacted at [email protected]