Progressive tax a remedy for inequality

Progressive taxation on high-income people can work well to reduce the income inequality that has been deepening in Bangladesh for years, analysts said yesterday. 

Progressive tax systems have tiered tax rates that charge higher-income individuals higher percentages of tax on their income and offer the lowest rates to those with the lowest incomes.

"If the government can impose a progressive tax on high-income people, it will be helpful to reduce inequality. But it is tough as the state is captured by elites," said Prof MM Akash, chairman of the Department of Economics at the University of Dhaka.

"In the parliament, most of the MPs are businessmen and rich. So, imposing a higher tax on the upper one per cent of the population is not easy."

"To do so, a strong political will is necessary so that the big fish are identified and brought under the tax net."

He urged the government to leave the middle-income people alone and impose more taxes on the upper-income people instead.

His comments came at a roundtable on "Progressive Taxation in Bangladesh: Why and How?" at the Daily Star Centre in the capital. The newspaper organised the discussion in association with the Wave Foundation and the Christian Aid Bangladesh.

Income inequality in the country has deepened in the past six years as shown in the latest Gini Coefficient data published by the Bangladesh Bureau of Statistics.

The Gini Coefficient related to income rose to 0.499 in 2022 from 0.482 in 2016 and 0.458 in 2010. A Gini index of 0 represents perfect equality, while an index of 1 implies perfect inequality.

Prof Akash said people also don't feel encouraged to pay taxes as they don't think they will get proper services from the government.

Speaking as the chief guest, Planning Minister MA Mannan acknowledged that income inequality is rising but the government is trying to tackle it by uplifting the lower-income people.

"The positive side is there is no hunger poverty and shelter poverty. Moreover, the living standard of the low-income people has improved. But since the income of the upper-income people has skyrocketed, inequality has deepened."

In order to cut inequality, the government started income transfer in 1996, the first of its kind in Bangladesh, through social safety net programmes, Mannan said.

He said many people are calling for a cut in the value-added tax rate, but it gives a huge revenue to the government.

"VAT is universal, unescapable, and people feel its pain the least."

The problem is, according to the minister, many businesses do not pay VAT to the government properly.

"So, the government has been trying to digitalise the process since 2012."

The National Board of Revenue (NBR) has a good intention to protect the lower-income people and impose more taxes on the higher-income groups, but it's goal changes when the government sets a revenue target for it and asks it to achieve it, said Mamun Rashid, country clients and markets lead at PwC Bangladesh.

"Then, the tax authority makes a back calculation based on the number," he said, adding that the NBR emphasises job creation keeping the need of the economy in mind and sets tax breakups accordingly.

He urged the government to collect taxes properly.

"An effective progressive tax system is a crucial tool to reduce inequality and raise more revenues," said Sayema Haque Bidisha, a professor of the Department of Economics at the University of Dhaka.

"The tax should be imposed at a higher rate at the upper level. Similarly, the wealth tax rate should be increased."

"But the surcharge was not imposed systematically in the upper slabs. We have not seen any progressive changes in the slabs that we have wanted."

Prof Bidisha, also the research director of the South Asian Network of Economic Modeling, suggested the government announce incentives for new taxpayers and grant waivers in some areas in order to expand the tax net in the rural areas.

Due to a lack of proper identification and monitoring, many people have remained out of the tax net for years and they have accumulated wealth under the names of family members, evading taxes, she said.

"The identification of the rich is necessary and digitalisation can contribute to this effect."

SM Zulfiqar Ali, a senior research fellow of the Bangladesh Institute of Development Studies, said the overall existing tax system can't be termed as progressive.

"We can say the direct tax is progressive to some extent," he said, citing that there are various slabs, which range from 10 per cent to 30 per cent.

"But the indirect taxes such as VAT are not progressive. This is because the poor are paying relatively higher tax in proportion to their income."

The tax-GDP ratio of Bangladesh is one of the lowest among South Asian countries, said Sanjida Islam, a lecturer at the Daffodil Institute of IT, while making a presentation.

She said it is imperative to introduce a better and poor-friendly tax regime. She also urged the government to ensure better services for taxpayers.

Mohsin Ali, executive director of the Wave Foundation, and Nuzhat Jabin, programme manager at Christian Aid Bangladesh, also spoke.