Is wealth tax the reply to Sri Lanka’s low tax income assortment? – Lanka Enterprise On-line


By Sathya Karunarathne

Successive governments have run fiscal deficits. Insufficient income assortment and unrestrained authorities expenditure have worsened the nation’s fiscal place.

Tax income which averaged over 20% of GDP in 1990 has declined to beneath 10% of GDP inAd hoc tax safety modifications have considerably eroded the tax base. Weak tax administration has furthermore contributed to the sharp decline in tax assortment.

Whereas tax income has contracted, authorities expenditure has ballooned over time. Proper now, authorities income is solely not ample even to satisfy its expenditure on salaries and wages and transfers and subsidies to households which embody pension funds and social welfare funds resembling Samurdhi.

On this context, there are fairly a couple of proposals put ahead to hold authorities income. One proposal is the reintroduction of the wealth tax.
A wealth tax is anticipated to bridge the opening between the wealthy and the poor, attaining equality.

This tax shifts the tax burden to prosperous households, taxing a person’s web wealth, which is the market value of full owned belongings. Proponents of wealth taxation argue that it is a progressive system of taxation and is an additional extraordinarily environment friendly gadget compared with earnings, property or agency taxes because of it addresses the difficulty of wealth focus.

Furthermore, a tax should ideally fulfill main traits of taxation: it shouldn’t be distortionary; it should be truthful, and it shouldn’t be strong to assemble.

The rationale for a wealth tax

One amongst many earliest proponents of the wealth tax for creating nations was Nicholas Kaldor. Based totally completely on his suggestion, a wealth tax along with an earnings tax, expenditure tax and a present tax had been launched in Sri Lanka in 1958.

Nonetheless, these new taxes yielded little income on account of difficulties in figuring out the tax base and factors in administration. Following the
suggestion of the Tax Value in 1990, 2 the federal authorities abolished the wealth tax from the 12 months of research 1992/1993.

Each income-generating and non-income producing belongings are taxed beneath wealth taxation. They could embody land, exact property, financial institution accounts, funding funds, psychological or industrial property rights, bonds, shares, and even jewelry, vehicles, artwork work and antiques.

Nonetheless, this tax base for wealth taxes has usually been narrowed by means of exemptions. These exemptions have been justified completely on the grounds of social points such because of the damaging social implications of taxing pension belongings. Additional liquidity components (eg – farm belongings), supporting entrepreneurship and funding (eg- enterprise belongings), avoiding valuation
difficulties ( eg- work and jewelry) and preserving nations cultural heritage (eg – work and antiques) have furthermore been cited as causes for wealth tax reliefs. Whereas a few of these exemptions is also justified, they’ve led to the low price of income raised from wealth taxes.

They’ve furthermore contributed to wealth taxes being rather a lot a lot much less equitable because of the wealthiest resembling firms income from these exemptions defeating the very function of imposing a wealth tax which is to satisfy its redistributive targets. Slender tax bases in wealth taxation usually ends in tax avoidance and evasion choices. For instance, Spain’s 1994 wealth tax exemption for the shares of proprietor managers resulted in rich firms reorganizing their actions to reap advantages of the exemption leading to a
crucial erosion of the wealth tax base.

Additional, fairly a couple of completely completely different elements have furthermore discouraged nations to maintain up a wealth tax. They’re significantly, the difficulty in figuring out the tax base or what belongings to be taxed, underreporting and undervaluation of belongings, problem in measuring wealth taxes distinguishing between
people who’re asset wealthy nonetheless money poor, the mounted have to cost belongings and audit returns rising administrative and enforcement prices .
Low income assortment together with the choice causes talked about have led to the abolishing of wealth taxes in most nations

Tax income from particular specific particular person web wealth taxes in 2016 ranged from solely 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. Sri Lanka’s expertise with wealth taxation was no absolutely completely completely different with the tax yielding low income as
reported by the 1990 Tax Value.

Nation Standing of the tax Rationale
India Abolished in 2015 There was substantial proof that the price of
administering the wealth tax was considerably elevated than the income generated from the tax.

France Abolished in 2018 Administration prices had been far elevated than the returns from tax. As a replacement of a wealth tax imposed a flat tax value on capital
good components. Elements surrounding decide the net price of an
particular specific particular person was an enormous contributor to capital outflows
from the nation.

Sweden Abolished in 2007 Sweden utilized a wealth tax for many of the twentieth century, although its income definitely not accounted for greater than
0.4% of the gross dwelling product contained in the postwar interval. One
goal is that the levy handled absolutely completely completely different belongings in every other case. This distorted funding as a result of the rich took on debt to purchase tax-free belongings. In 2007 the federal authorities repealed its 1.5% tax on private wealth valued at over $200,000.

Germany Abolished in 1997 Recovering taxes was greater than the income derived. A 2018 evaluation discovered that Germany’s long-run GDP might be
5% decrease with a wealth tax and employment would shrink by
2%. That is acknowledged to be on account of patrons might be disincentivized to take a position. The evaluation concludes that the wealth tax’s “burden is carried by almost all folks, as indicated by the decline in GDP, funding, and employment”.

Austria Abolished in 1994 The chief burden of calculating the precise levy resulted in crucial damaging externalities.

Pakistan Abolished in 2003 This led to an enormous outflow of dwelling capital and the utilization of unlawful channels such because of the “haffala “system to
launder cash. Abolished as a result of damaging externalities.


Taxing the wealth of the wealthy to generate earnings and to put off financial inequality sounds promising within the case of political debate. Nonetheless, wealth taxes have didn’t generate sufficient income, failed to satisfy redistributive targets on account of slim tax bases, confirmed to have excessive
administrative and enforcement prices, resulted in tax evasion and avoidance on account of underreporting and undervaluation of belongings, elevated the hazard of capital flight and entry to tax havens and might have contributed to the low price of funding and employment.

Because of this actuality, imposing a wealth tax might not be the best safety response to Sri Lanka’s low taxrevenue, notably given the nation’s earlier expertise with the tax yielding low income.

Sathya Karunarathne is the Analysis Analyst on the Advocata Institute and is also contacted at Look at additional about Advocata’s work at The opinions expressed are the creator’s non-public views. They may not primarily replicate the views of the Advocata Institute, or anybody affiliated with the institute.

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