Thread by @ChayuDamsinghe

1/ These tax changes are sudden and unexpected, cause pain, and feel unfair for many. I'm going to try and make some sense of why this ended up so and what we can do about it.

#EconomicCrisisLK #SriLankaEconomicCrisis #lka #SriLanka #TaxHike

2/ Personal views not reflecting anyone else. Twitter is also not a great place for this due to character limits - so this interview I did might be a better explanation.

3/ To start with - yes, these taxes are painful. There's no question about it. Yes, the pain will be different for different people - someone might have to cut down on a night of drinks with friends while someone else might struggle with debt.

4/ Yes, the pain might be something that happened because of increased expenditure space after GR's tax cuts or consumption choices subsidized indirectly by the government now being adjusted.

5/ Yes, the pain might also part of the shared burden we all have to face, and a question of what the "Middle class" is, especially given the massive inequality in Sri Lanka. I spoke of this here.

https://twitter.com/ChayuDamsinghe/status/1581194544267546625

6/ But whatever the specific pain is, regardless of why it happened, regardless of whether someone voted for it in the past unknowingly or not, regardless of who is to blame for it, of course it is tough to whoever goes through it NOW.

7/ All I can try to say on the pain is this. It could easily have been much worse if not for this, and it can be worth it if we make it so. Let me go through those 2 points separately.

8/ The first is related to whether there could have been other alternatives instead. Unfortunately, I don't think there was anything else realistic that we could have done fast enough to avoid worse outcomes.

9/ I've seen questions about why not tackle corruption, why not deal with expenditure, why not deal with tax collection. All of these are valid questions, and it can feel very unfair if this isn't done because well, it is unfair.

10/ Let's take these questions individually.

First on corruption. Sadly, I don't see how we can solve corruption overnight. We must make steps towards it obv (and there are some that are happening), but it is incredibly hard. I spoke more of it here.

https://twitter.com/ChayuDamsinghe/status/1581194876699684865

11/ Second on expenditure. Once again, not really easy to do quickly (there are again, some steps being taken). I previously spoke about how we can look at expenditure and in what ways it will be difficult.

https://twitter.com/ChayuDamsinghe/status/1551206915606466560

12/ It might also feel as if we don't already get anything in return for the taxes we have paid, but that's not necessarily true. Rehana's thread below shows that we DO get a lot, directly and indirectly already.

https://twitter.com/RegularReh/status/1580100825468522498

13/ Third on tax collection. This is also an absolutely critical part of tax reform and I'll spend some more time on this here. Without tax admin reform, we might be able to get to a place where we're barely doing okay. For proper reform, we definitely need tax admin reform.

14/ Once again though, this isn't something that can be done quickly. There ARE steps that can be taken fast (eg-widening net, removing exemptions) - which actually HAVE been taken. But for the rest, we need to invest in our tax systems. We need money for that.

15/ But why do we need to move so fast in the first place? The #1 reason is that our tax ratios are so bad. Not just bad in fact, but literally among the lowest in the world. We really can't afford to wait any amount of time there.

https://twitter.com/ChayuDamsinghe/status/1551207237523480576

16/ The two short term alternatives are either borrow more money or print more money. Borrowing even more for longer could easily mean higher interest rates (and the costs of going even higher than now for an extended period of time could be really bad for everyone).

17/ Printing more money will mean back to the same cycle of spending more and importing more and seeing the currency depreciate again (unless there's magic inflows). Otherwise, we could be back to massive shortages. I am quite confident that that is a far worse outcome.

18/ Because neither of those financing alternatives can be maintained for too long, it will also mean we'll have to put these taxes in anway. But waiting some more time might mean we need even higher taxes because things will have gotten worse in the meantime.

19/ There's also the fact that in order to get the IMF board level approval, getting tax increases on the top 10% of the population would anyway have been needed. We have zero space to negotiate with the IMF - we really need their help, so really no alternative there either.

20/ Yes, it absolutely sucks that this happens when prices are so high. Usually though, tax hikes are part of the solution to bring down inflation - because it brings down demand for non-essentials and especially, non-essential imports. That helps maintain the currency naturally.

21/ Yes, even if it was absolutely necessary, doesn't take away from the fact that it is going to be so painful for a good many people. It's very natural to feel like this is completely unfair but unfortunately, I really don't see any way forward without it.

22/ But this gives us a critical opportunity. These reforms are unlikely in my view to be significantly altered anytime soon because of the reasons I mentioned, but there is now a huge incentive for us as taxpayers to force change.

23/ All these questions on corruption and expenditure management and tax collection? It's now the time to make sure that the steps that are started on this really continues. That's the action point for us now. Force the change we want.

24/ Yes, there's no guarantee that good changes will happen, but it's not like it has never happened. We do really good work with our health and education systems despite minimal funding - so by forcing change, we might be able to get great results.

https://twitter.com/ravirannaneliya/status/1580791204001693696

25/ These painful tax changes are necessary in my view. What is equally necessary, if not more, is reforms on everything else. We must use this as an opportunity to make sure that happens as well. Looking at other countries makes me feel this is possible. Let's aim for that.