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VOL 23 NO 53 REGD NO DA 1589 | Dhaka, Sunday, January 3 2016
Posted : 03 Jan, 2016 22:34:43 AA-A+
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Establishing a tax compliance covenant – II
Canons of Adam Smith - a starting point for tax bargain
Ahmed Munirus Saleheen

Paradoxes and challenges ingrained in taxation prompted the classical economist Adam Smith to devise his famous canons of taxation in The Wealth of Nations. He said, "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state." This maxim is clearly related to two pivotal principles of taxation: ability to pay and benefits of taxpayers. His other maxims incorporate the principles of simplicity, cost-effectiveness, equity, and predictability. 


All these principles as well as a role in state-building that the fiscal sociological scholars maintain taxation should perform warrant what has come to be known as tax bargain or revenue bargain. According to Mick Moore, revenue bargaining 'entails some exchanges in the form of representation by the taxpayers and responsiveness and effectiveness from the states'. He has identified some observable indicators of revenue bargaining. These are: (a) the presence of revenue issues on the public policy agenda; (b) collective action by groups of taxpayers around taxation issues, whether through electoral or other channels of representation; and (c) the willingness of government to interact with and respond to taxpayers' expressed or anticipated preferences in making public policy. 


Another overarching reason for institutionalising tax bargain is the pervasiveness of corruption in the taxing system of most developing countries. Research findings show that at least half of the revenue that should be collected can be lost by government treasuries in developing countries through corruption and tax evasion. Researchers have attributed the generally more tangible presence of corruption in tax administrations, particularly in those of developing countries, to their complex tax and trade regimes including multiple discretionary exemptions, confusing and nontransparent procedures for tax compliance and excessive  discretionary power of tax collectors. 


The consequences of corruption in tax departments do not end in losing revenue on account of corruption itself, it triggers further damages: corruption and tax evasion reduce voluntary compliance with tax laws and regulations, demoralise honest taxpayers, and create an atmosphere of cynicism.


Modern tax literature argues that dependence on taxation through the process of tax bargain contributes to:  (a) creating a better enabling environment for both tax collectors and taxpayers (b) establishing a compatible and capable bureaucracy for revenue collection fairly and transparently, and (c) to empowering taxpayers to demand befitting reciprocity from the state which, in turn, needs to respond to the citizens' demands to sustain state revenue.


That is to say, so far as democratic values are concerned, for a state, dependence on earned  income  (revenue collected through bureaucratic and organisational effort) is much desirable than on unearned  income (aid and own natural resources). Because, 'the greater the dependence of the state on earned income, the more likely are the state-society relations be characterised by accountability, responsiveness and democracy.' Studies provide evidence from the oil-rich countries of the Middle East and North Africa that they tax their people less heavily and in turn, the citizens are less likely to demand accountability and representation from their government. In this respect, the exposition of the Newsweek magazine with reference to Pakistan is worth noting. According to the Newsweek (2008): "Extensive research shows that when governments luck into unearned cash (which economists call 'rents') from oil or other resources, the healthy links that bind them to the citizens are often severed. Freed from relying much on taxes, governments spend the money arbitrarily. Citizens, left untaxed, feel less motivation to monitor things carefully. The result is corruption, misrule, and a host of other ills."


The magazine argued that the strategic rents that the military regime in Pakistan under the leadership of Parvez Musharraf received made the country's military enormously powerful and resistant to democratic checks. The hypothesis of the reliance on rents rather than on tax revenue and the resultant decadence have been found correct in many other countries also. 


So, what we venture to underpin here is that tax is not an unrequited, compulsory payment that is collected coercively by the state - at least it should not be. Rather it can be a healthy link between the state and its citizens based on reciprocity. And here comes the seminal role that tax bargain can play.  We can now proceed to elaborate it in the context of Bangladesh. 


There is no denying the fact that compliance is the pivotal issue in taxation. On this score, Bangladesh's performance is utterly poor, evident not only from poor tax-GDP (gross domestic product) ratio but also from the number of taxpayers. According to the Finance Minister's budget speech, only around 1.2 million individual and companies/organisations currently pay Income Tax, which has been targeted to be raised to three million by 2018-19. Similarly, the number of businesses registered under VAT system is quite poor compared to the number of total registrable businesses in the country. But the pivotal question is:what ensures compliance- enforcement or moral obligation or a combination of both? Tax pundits have come to agree that apart from legal binding to pay taxes, principles such as reciprocal transparency, understanding and trust in the relationship between taxpayers and the tax administration constitute a compliance covenant. Researchers argue that taxpayers' attitude towards the tax system, its perceived purposes and fairness determines the degree of tax compliance. Even official documents admit that the lack of the confidence of the taxpayers in the taxing system is an impediment to raising tax-GDP ratio to an expected level in Bangladesh.


So, in order to earn trust and confidence of taxpayers, the initiative of the National Board of Revenue (NBR) of engaging its stakeholders in revenue dialogue is undoubtedly a right approach towards revenue bargain. Income tax day, VAT week and tax fairs are also aligned with the idea of civic engagement. But it needs to be ensured all these events do not  eventually turn into what Arnstein terms 'empty ritual'  that allows the host (in this case, NBR) to disseminate its messages to its stakeholders in the first place,  and then to claim that all sides were considered, but at the end benefit goes to itself only. In Bangladesh taxation, the participatory sphere has historically remained limited to the stages of information, consultation and placation. It needs to be elevated to the stage of partnership and citizen control where stakeholders find their voice reflected in the tax policy itself. In order to promote tax bargain, the revenue authority should carve new spaces for civic participation in the formulation of tax policies. Particularly, actors such as people's representatives and civil society organisations (CSOs) need to be given more political space in the bargaining processes.


Apart from the tax authority, citizens have their own responsibility in striking a tax bargain with the tax authority in order for the former to demand responsiveness, accountability and   transparency from the state. Especially the civil society organisations (CSOs) and media have a significant role to play. But unfortunately, in Bangladesh, the otherwise vibrant CSOs are apparently indifferent towards tax issues. They should also come forward to engage in bargains not only in 'invited space' but also in 'claimed space'. This bargain obviously entails a win-win approach, rather than the conventional stance of blame game. 


The Addis Ababa Action Agenda, which emerged from the Third International Conference on Financing for Development held in 2015, reinforced the importance of domestic resources mobilisation. Having acknowledged the urgency of raising adequate amount of revenue for public expenditure, the next question is: how to do that?  The ways are already there. For example, paradoxes and challenges ingrained in taxation prompted Adam Smith to devise his famous canons at the centre of which lie two pivotal principles of taxation: ability to pay and benefits of taxpayers. In Bangladesh, the Smithsonian canons of fair taxation can be a starting point for tax bargain. 


Like it or not, taxes are as inevitable as death, as maintained by the US statesman Benjamin Franklin. But the question is whether we as taxpayers will remain reluctant partners as we are now or take a proactive role to turn a 'necessary evil' into a source of a host of social goods. That largely depends on the extent we promote tax bargain.


The writer has done doctoral research on the relationship between taxation and governance. This article has been drawn from his thesis.  


ahmedmsaleheen@yahoo.com.


 
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