The sensitivity of direct tax realisation
Taxation has four main purposes: revenue, redistribution, re-pricing, and representation.
The main purpose is taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like market regulation and legal systems.
A second is the redistribution. Normally, this means transferring wealth from the richer sections of society to the poorer sections.
A third purpose is re-pricing. Taxes are levied to address externalities. Tobacco is taxed, for example, to discourage smoking and many people advocate policies such as implementing a carbon tax.
A fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens and citizens demand accountability from their rulers as the other part of this bargain.
Re-framing tax revenue regulations should deserve a very close review of existing rules one by one, if not word by word, in fitting with present-day demands of social norms and business practices. If these regulations have to be effectively enforceable, prudently practised and impartially implemented in a free and democratic environment, it has to be such a public law framed by the lawmakers who should also be within its jurisdiction.
Rules should not be framed only for the ruled and should not be a tool for applying discretionary power by enforcement officials, but be applicable to all indiscriminately.
To be sound, a tax system must be economically efficient, inflicting as little damage as possible on the economy. Every tax system distorts economic decisions and leads to less economic activity than otherwise would occur, resulting in what economists call "deadweight loss."
It has been argued that typical estimates of the economic cost of a taka of tax revenue range from 20 paisa to 60 paisa over and above the revenue raised."
What is more, applying different tax rates to different activities or producers exacerbates the distortion of economic decisions and increases the deadweight losses due to the tax system. A sound tax system should be designed to minimise these losses.
A sound tax system should impose the smallest possible compliance costs on taxpayers otherwise people will not be encouraged to pay tax, rather they will be inclined to evade tax.
Ultimately, every tax system diverts a portion of tax revenues raised by the tax to pay the cost of administering and collecting the tax and enforcing its provisions. A sound tax system would minimise these costs.
Just a little bit of effort by the citizens should be required in paying taxes. Otherwise, the government could do and take whatever it wanted.
In democratic nations where the public elects those in charge of establishing the tax system, these choices reflect the type of community that the public wishes to create. In countries where the public does not have a significant amount of influence over the system of taxation, that system may be more of a reflection of the values of those in power.
Debates about taxes usually devolve into "the wealthy can afford it" or "it is unfair to be taxed so harshly". Neither argument has merit. Tax the wealthy too harshly, and they will stop creating wealth. Tax them too leniently, and either society will be unable to govern itself, or the rest of society will be so harshly taxed that it will rebel.
It is entirely a matter of practicality. As pundits have put it, "If you know the position a person takes on taxes, you can tell their whole philosophy. The tax code, once you get to know it, embodies all the essence of life: greed, politics, power, goodness and charity."
The author is a former chairman of the National Board of Revenue. He can be reached at mazid.muhammad@gmail.com.