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


By Sathya Karunarathne

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

Tax revenue which averaged over 20% of GDP in 1990 has declined to beneath 10% of GDP inAd hoc tax security modifications have significantly eroded the tax base. Weak tax administration has moreover contributed to the sharp decline in tax assortment.

Whereas tax revenue has contracted, authorities expenditure has ballooned over time. Correct now, authorities revenue is solely not ample even to fulfill 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 pretty a few proposals put forward to carry authorities revenue. One proposal is the reintroduction of the wealth tax.
A wealth tax is anticipated to bridge the opening between the rich and the poor, attaining equality.

This tax shifts the tax burden to affluent households, taxing an individual’s internet wealth, which is the market worth of full owned belongings. Proponents of wealth taxation argue that it’s a progressive system of taxation and is an extra terribly surroundings pleasant gadget in contrast with earnings, property or company taxes due to it addresses the problem of wealth focus.

Moreover, a tax ought to ideally fulfill important traits of taxation: it should not be distortionary; it must be truthful, and it should not be sturdy to assemble.

The rationale for a wealth tax

One among many earliest proponents of the wealth tax for creating nations was Nicholas Kaldor. Based mostly completely utterly on his suggestion, a wealth tax together with an earnings tax, expenditure tax and a gift tax had been launched in Sri Lanka in 1958.

Nonetheless, these new taxes yielded little revenue on account of difficulties in determining the tax base and elements in administration. Following the
suggestion of the Tax Worth in 1990, 2 the federal authorities abolished the wealth tax from the 12 months of analysis 1992/1993.

Every income-generating and non-income producing belongings are taxed beneath wealth taxation. They may embody land, actual property, monetary establishment accounts, funding funds, psychological or industrial property rights, bonds, shares, and even jewellery, autos, paintings work and antiques.

Nonetheless, this tax base for wealth taxes has often been narrowed by way of exemptions. These exemptions have been justified utterly on the grounds of social factors such due to the damaging social implications of taxing pension belongings. Further liquidity parts (eg – farm belongings), supporting entrepreneurship and funding (eg- enterprise belongings), avoiding valuation
difficulties ( eg- work and jewellery) and preserving nations cultural heritage (eg – work and antiques) have moreover been cited as causes for wealth tax reliefs. Whereas just a few of those exemptions can be justified, they’ve led to the low worth of revenue raised from wealth taxes.

They’ve moreover contributed to wealth taxes being reasonably quite a bit quite a bit a lot much less equitable due to the wealthiest resembling companies revenue from these exemptions defeating the very operate of imposing a wealth tax which is to fulfill its redistributive targets. Slender tax bases in wealth taxation often ends in tax avoidance and evasion decisions. As an example, Spain’s 1994 wealth tax exemption for the shares of proprietor managers resulted in wealthy companies reorganizing their actions to reap benefits of the exemption resulting in a
essential erosion of the wealth tax base.

Further, pretty a few utterly utterly totally different components have moreover discouraged nations to take care of up a wealth tax. They’re considerably, the problem in determining the tax base or what belongings to be taxed, underreporting and undervaluation of belongings, downside in measuring wealth taxes distinguishing between
individuals who’re asset rich nonetheless cash poor, the mounted must value belongings and audit returns rising administrative and enforcement costs .
Low revenue assortment along with the selection causes talked about have led to the abolishing of wealth taxes in most nations

Tax revenue from specific particular specific individual internet wealth taxes in 2016 ranged from solely 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. Sri Lanka’s experience with wealth taxation was no completely utterly utterly totally different with the tax yielding low revenue as
reported by the 1990 Tax Worth.

Nation Standing of the tax Rationale
India Abolished in 2015 There was substantial proof that the value of
administering the wealth tax was significantly elevated than the revenue generated from the tax.

France Abolished in 2018 Administration costs had been far elevated than the returns from tax. As a substitute of a wealth tax imposed a flat tax worth on capital
good parts. Components surrounding resolve the web worth of an
specific particular specific individual was an unlimited contributor to capital outflows
from the nation.

Sweden Abolished in 2007 Sweden utilized a wealth tax for most of the twentieth century, though its revenue positively not accounted for larger than
0.4% of the gross dwelling product contained within the postwar interval. One
objective is that the levy dealt with completely utterly utterly totally different belongings in each different case. This distorted funding on account of the wealthy took on debt to buy tax-free belongings. In 2007 the federal authorities repealed its 1.5% tax on personal wealth valued at over $200,000.

Germany Abolished in 1997 Recovering taxes was larger than the revenue derived. A 2018 analysis found that Germany’s long-run GDP is likely to be
5% lower with a wealth tax and employment would shrink by
2%. That’s acknowledged to be on account of patrons is likely to be disincentivized to take a place. The analysis concludes that the wealth tax’s “burden is carried by virtually all people, as indicated by the decline in GDP, funding, and employment”.

Austria Abolished in 1994 The chief burden of calculating the exact levy resulted in essential damaging externalities.

Pakistan Abolished in 2003 This led to an unlimited outflow of dwelling capital and the utilization of illegal channels such due to the “haffala “system to
launder money. Abolished on account of damaging externalities.


Taxing the wealth of the rich to generate earnings and to place off monetary inequality sounds promising throughout the case of political debate. Nonetheless, wealth taxes have did not generate adequate revenue, didn’t fulfill redistributive targets on account of slim tax bases, confirmed to have extreme
administrative and enforcement costs, 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 may need contributed to the low worth of funding and employment.

Due to this actuality, imposing a wealth tax may not be the very best security response to Sri Lanka’s low taxrevenue, notably given the nation’s earlier experience with the tax yielding low revenue.

Sathya Karunarathne is the Evaluation Analyst on the Advocata Institute and can be contacted at Take a look at extra about Advocata’s work at The opinions expressed are the creator’s personal views. They could not primarily replicate the views of the Advocata Institute, or anyone affiliated with the institute.

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