Thread by @ChayuDamsinghe

I promise I'll try my best to make this not-boring, but let's talk taxes in Sri Lanka.

#SriLanka #SriLankaEconomicCrisis #lka (also #GotaGoGama #OccupyGalleFace #අරගලයටජය #GotaGoHome2022 for reach)

(1/24)

Our tax revenue before 2019 was about 11-12% of GDP. After the tax cuts, this came down to around 8%. Both in comparison to around 12-14% in non-debt expenditure (about 16% in 2019 due to election goodies)

Explained how this was a problem here

https://twitter.com/ChayuDamsinghe/status/1510529458058702851

(2/24)

In an attempt to make this easier to digest, going to bring back Rehan (our rich guy), Pasan (who I've made less poor than he was), and a new fellow Ayesh who's basically in poverty.

Rehan earns 500k a month. Pasan earns 50k. Ayesh earns 15k.

(3/24)

So Sri Lanka has 2 broad forms of taxes -

1 -direct taxes (ie, taxes on income/profit like 10% of income over 100k goes to the government) and

2- indirect taxes (ie like VAT - 15% of the price of this biscuit packet goes to the government).

(4/24)

Lets take the example of a 15% VAT on food. From HIES 2019 (and an estimate for Rehan), assume that the average monthly food expenditure for Rehan, Pasan, Ayesh was as -

R-100k (20% of income)
P-23k (~45% of income)
A-11.25k (~75% of income)

(5/24)

So then, that means Rehan pays ~13k in food VAT (2.5% of income), Pasan pays ~3k (6% of income), and Ayesh pays ~1.5k (~10% of income).

Yes, Rehan pays more than Pasan who pays more than Ayesh - but see, the poorer you are, the greater % of your income goes to taxes.

(6/24)

Adding non-food at same rates makes this 10%, 13.5%, and 17.5% respectively.

That's clearly not fair. Ayesh earns just 15k and he still pays a greater % of his money as indirect taxes than the others.

Are direct taxes fairer? Yes, they're designed that way.

(7/24)

According to 2018 rates, Pasan and Ayesh would not have paid income tax. But Rehan would have.

Rehan would have paid around 65k in taxes (assuming no deductions etc) - or ~13% of income.

Given his income (+other country levels), that's very fair

https://twitter.com/yolanifernando/status/1515295275555848199

(8/24)

Okay then why don't we just do direct taxes?

Main issue IMO is collection is harder. There are so many loopholes, the administration system is quite bad and outdated, and it's easy to essentially evade the system

Compare to indirect taxes, which are taxed at the source

(9/24)

Now, this must be fixed for sure.

Systems like PAYE/WHT put the tax burden at the source and not the individual taxpayer.

This often leads to more tax being collected since there's less work to do - no tax forms, no tax estimates, just a deduction on Rehan's salary.

(10/24)

My view is that removing unfair deductions is another key thing to do - to make sure Rehan can't write off his shiny new BMW off as a tax credit.

Expanding what counts as income - measures to include unaccounted income like consultancy fees can be in place IMO.

(11/24)

Another part of this is corporate income tax. Yes, the last 2 years have been operationally very difficult. But that doesn't change the fact that the tax cuts have really helped companies make better profits. Dr N shows this well at 55:15 here



(12/24)

Of course, raising taxes on Rehan will have plenty of criticism, often from Rehan himself.

My personal view is that Rehan is well off enough to take that hit, especially in an economic crisis that's affecting Pasan and Ayesh far more.

(13/24)

There's also the idea of "growth" but come, we've seen this trickle-down economics story since the 80s across the world, and I don't think there's much evidence.

Would someone who tries NOT to pay tax, suddenly turn good guy and give all that profit to someone else?

(14/24)

There are other alternatives suggested, such as widening the tax net (we do that first by reducing the tax-free threshold), better administration, and reducing expenditure instead (I'll get into this later).

But important to be aware of Rehan's personal incentives.

(15/24)

The thing is, there are only some easy fixes for direct taxes. Immediately setting up PAYE and WHT is relatively straightforward, as is increasing tax rates.

But fixing our tax administration will take time. Time we don't have.

(16/24)

While we need to increase taxes, especially on people like Rehan who can afford it the most, there's another issue.

Around 80% of our tax revenue comes from indirect taxes.

(17/24)

That means, unfortunately, despite the greater relative pain the poorer you are, it seems Sri Lanka still needs indirect taxes.

Lowering it was a mistake we're paying for with a far greater tax (inflation) which again affects Ayesh the most.

(18/24)

So based on that analysis, that means we have many steps needed on tax alone.

1. Increase income tax
2. Reintroduce PAYE/WHT
3. Reintroduce VAT
4. Start tax admin reform

(19/24)

But this is only part of the solution. There is also an expenditure side.

Now, our expenditure as a % of GDP is actually not that high, despite popular belief -we're in fact in the bottom quarter in Asia.

(20/24)

While there are definite issues, especially with SOEs, cutting the state sector massively is neither practical, nor desirable given it'll leave thousands unemployed.

Reform for sure, and there ARE areas to cut, but we don't have an overall expenditure issue in my view.

(21/24)

In my view, what we really do need to do, is make sure we use some of the space we gain to give cash transfers to Ayesh and others that are poor.

Back of envelope calculation suggests that a 10k allowance to bottom 60% of households costs ~2.5% of GDP

(22/24)

Assuming we balance the budget and then do a 2.5% deficit for that purpose, seems fair to me.

If this was 2 years ago, I'd even suggest just printing that. The benefit of better tax policy and stronger social safety combined, outweighs the costs IMO. But too late now.

(23/24)

In the end, taxes are a part of life. We can't get away with not paying them, in the end, it comes back to bite us - as it currently has.

Let's make sure we do our part, especially those of us that can, so that those that can't have some support.

(24/24)