Proposed budget may raise inequality
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belief that tax cuts for the better off would have trickle down benefits through greater innovation and higher growth.
Since the time of former US president Ronald Reagan, conservative economists and politicians in the industrially developed nations are pursuing the Washington Consensus and the progressives have continuously opposed the idea and tried to enhance corporate tax rates in many ways.
Former US president Donald Trump cut corporate tax to 21 per cent from 35 per cent while his successor, Joe Biden is trying to pull it up to 25 per cent this year.
Nobel laureate and renowned global economist Joseph Stiglitz in an article titled “Why Tax Cuts for the Rich Solve Nothing”, published by Project Syndicate in 2017 wrote, “It won’t, because it never has. When president Ronald Reagan tried it in the 1980s, he claimed that tax revenues would rise. Instead, growth slowed, tax revenues fell, and workers suffered. The big winners in relative terms were corporations and the rich, who benefited from dramatically reduced tax rates.”
In the same article, Stiglitz also ruled out the possibility of higher savings and investments from the private sector and argued, “There is simply no theoretical or empirical basis for this, especially in countries like the US, where most investment (at the margin) is financed by debt and interest is tax deductible. The marginal return and marginal cost are reduced proportionately, leaving investment largely unchanged. In fact, a closer look, taking into account accelerated depreciation and the effects on risk sharing, shows that lowering the tax rate likely reduces investment.”
Bangladesh’s economy in this context is similar to the US. In Bangladesh, most investments are financed by debt too. The expectations of greater private savings and investments will not be materialised.
Cutting the corporate tax rate would have worked better in Bangladesh if most of the corporate bodies had been tax compliant and savings from such lowered tax would be invested in productive sectors with due care.
But the reality is that most businesses in the country hide a lion’s share of their income to pays comparatively little income tax. Actually, they do not bother about the income tax rate. Mismanagement is rampant in the business community.
In the absence of efficient management, better profit, savings and investments cannot be expected. Only a handful of good multinationals and a few local companies with better corporate governance systems will benefit from these tax cuts. Most of the big multinational companies are from the power, oil and gas, and infrastructure sectors. These companies, however, take a very calculated business risk. Further investment opportunities in their respective sectors are very limited.
No person with an understanding of Bangladesh’s current economy and reasonable economic sense do not expect anything from Mr. Kalmal’s tax cut. In fact, the current and proposed budget’s tax cut will result in more economic and social inequality, which have been widening in Bangladesh with rising robust economic growth over the last twelve years.
Last year, IMF Managing Director Kristina Georgieva wrote in a blog that higher tax rates for the better off were needed as part of a policy rethink to tackle inequality.
The IMF has moved away from the tax-cutting approach that once formed a central part of its policy advice. Tax cutting benefited only the big monies. G7 finance ministers also agreed to a tax clampdown and took a first step towards dismantling the irresponsible beggar-thy-neighbour version of capitalism.
Instead of tax cutting, Bangladesh needs to widen its tax net by reducing corruption amid taxmen and introduce more digital tools for tax collection. This would help the government spend money in the need of the poor and pandemic-induced new poor that is estimated to have risen to three crore.
The pandemic made many people jobless and many more are surviving with lower income at a time when the price of essentials are continuously skyrocketing. Aggressive social spending is needed to increase the money flow to the bottom, which will increase velocity of money i.e., keep the economy vibrant.
In the current fiscal year, government spending was lower than the target. Many of the funds allocated for infrastructure, education, and health remained unspent because of the pandemic itself, inefficiency in public services and government policy for spending only on essential purposes.
During an economic hardship, the government should collect more from well-off people and spend that on social purposes so that money flow to the bottom remains uninterrupted. This would create employment as well as demand for goods and services produced or served by the cottage, micro, small and medium enterprises (CMSMEs) that provide more than 40 per cent of employment in Bangladesh and are the worst victims of the pandemic.
But the government’s policy was just the opposite. This is the time to correct all the wrong policies that the government took during the first year of the pandemic.
The budget for 2021-22 is still in its proposal stage, awaiting approval in the parliament by the end of this month. The proposed budget has increased the number of beneficiaries of social safety nets but that is not enough to tackle the current dire straits of the country’s ultra-poor.
Spending more on social safety programmes by increasing both the number and amount would ease the lives of millions, direct cash support for the self-employed and waged people who lost their jobs and are surviving with reduced wages as well as the CMSMEs is the need of the hour.
Instead of seeing what the private sector does, the government should make huge public investment in the dilapidated health sector, education and infrastructure in order to generate employment for the new poor and keep the economy flourishing. The government cannot afford to miss the tune of the hour.
The writer is a fellow chartered accountant and managing partner of Ahmed Sheikh Roy & Co.