Muddling along
Posted on March 5th, 2016

Editorial Courtesy The Island 

Yesterday’s newspapers had many reports of government considering various measures, including tax reforms, to increase its revenue. One report had it that the capital gains tax will be reintroduced. What the eventual outcome will be is likely to be revealed in the short term – probably the next few weeks. It is widely known that the government is woefully cash-strapped and is looking at an IMF bailout. There are conditions attached to the grant of such facilities and the medicine prescribed will certainly not be sweet. The government is placed in a difficult predicament of its own making on the fiscal front thanks partly to the various populist handouts to the electorate ahead of the August 2015 parliamentary election and fulfilling various election related promises. Pay up time is now staring it in the face and some hard decisions are overdue. The UNP – SLFP national government cannot in anyway minimize the political fallout of inevitable unpopular decisions because former President Mahinda Rajapaksa commands a formidable opposition force. The incumbent government is by no means a grand coalition of the country’s two major political parties enabling implementation of unpopular but necessary measures for want of an effective opposition.

Rajapaksa probably has more support within the SLFP than its leader, President Maithripala Sirisena, notwithstanding sweeteners like ministries, deputy ministries and other blandishments that have been handed out with gay abandon. These include indefensible appointments of defeated candidates on the National List to the legislature. Factor Rajapaksa’s support from non-SLFP parties within the UPFA and it is clear that a formidable opposition confronts the government. That obviously bodes ill for implementation of unpopular measures that are becoming unavoidable by the day. So the best way the government can face up to this situation is to collect as much taxes as it could from the more affluent sector of the population and spare the poor as far as possible. That is also the fairest and most equitable was of handling the problem. Prime Minister Ranil Wickremesinghe in a recent speech spoke of spoke of those owning 80% of the country’s capital paying only 20% of its taxes, most likely hinting at what is on the way.

If some unpopular fiscal measures, hurting not only the rich but also probably affecting the middle class and not leaving the poor untouched is in the offing, nobody should be surprised if there will be no local elections this year despite previous contrary assurances. A local election will give the opposition an opportunity not just to test but to prove its mettle. This is obviously something the government will not want. There is no great demand among the people for local elections in any case. Our perception is that only those who aspire to get elected to these bodies and political parties, like the pro-Rajapaksa SLFP/UPFA faction and of course the UNP which will benefit from a divided SLFP running in the contest if that happens, would want them. The average elector is polls weary. The bottom line is that the government would prefer this elections to be deferred and that is why Local Government and Provincial Councils Minister Faizer Mustapha who was singing a different tune not so long ago is now blaming the Jayalath Dissanayake National Delimitation Commission to justify what appears to be an inevitable postponement.

In his recent speech, the prime minister remembered that when he was small his parents paid a variety of taxes – capital tax, estate duty (sometimes called death duty), capital gains tax, wealth tax etc. Dr. N.M. Perera as finance minister imposed a capital levy which was not favoured by the SLFP which led the then ruling United Front coalition. The continuance of that tax would have inevitably forced the rich to dispose of their capital. That would of course have led to consequences like the lack of surpluses available for investment. It is unlikely that a UNP prime minister would go as far as the LSSP leader did. But perhaps it is time that the present government looks at reintroduction of inheritance tax like estate duty abolished during the 1977 dispensation and also a wealth tax. These must be very carefully examined and the rates must be reasonable. Enforcement must be equitable and not motivated by ‘leveling down’ considerations that perhaps impelled the previous capital levy. Taxes, they say, must be collected the way bees collect nectar from flowers without hurting the flower itself.

There is no doubt that the better off sections of our population must pay more taxes but nobody will like to do that. A credible demonstration by the government and its functionaries that financial profligacy is being reined, corruption curbed and waste minimized would make it easier to blunt the resentment of those being squeezed for more taxes. Given the ever rising cost of living, most sections of the population except the very rich have been feeling the pinch. That is why the progressive raising of the threshold at which personal income tax is payable has been widely welcomed. This was further raised in the last budget and will mean that a fair number of those paying Pay As You Earn (PAYE) taxes deducted by employers from the sheets of liable employees and remitted direct to the inland revenue department will be off the tax hook. There has been speculation that this threshold will be lowered in the contemplated reforms. But taking away what has been granted will be difficult for any government.

Given the fact that there were an unprecedented number of changes in the 2016 Budget presented by Finance Minister Ravi Karunanayake, the government has promised to present the current picture to Parliament. That will be an opportunity to present the contemplated tax reforms to the country. The people must know what is in store for them.

Whatever reforms are implemented, there is no likelihood of the government being able to balance its books. The chances, unfortunately, are that we will continue to muddle along as we have long done.

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