“Sri Lankans must learn to pay their taxes”: Such was the response made by a Canadian lady in response to a Facebook thread where a local academic expressed dissatisfaction at the sudden increase in taxes, and many others joined to share their grievances. The comment implies several assumptions, including the notion that Sri Lankans are generally not accustomed to paying taxes and may be adept at evading their tax obligations. It further suggests that the populace is reliant on government benefits and that this dependence is unsustainable. To address this, the government must collect sufficient income to maintain its operations without resorting to printing money. Therefore, Sri Lankans must prioritize paying taxes rather than treating it as a discretionary act
This view is not completely unsubstantiated. We have been receiving so many ‘freebies’ for the past 75 years, we have forgotten that somebody has to pay for them. It is widely acknowledged that taxation serves as the main source of government revenue. Therefore, it is universally agreed that citizens have a responsibility to pay taxes. However, there is a growing debate among professionals regarding the appropriate level of taxation that should be imposed.
Paying taxes is nothing new. Citizens have been paying taxes from time immemorial. King Parakramabahu, about 900 years ago, taxed paddy production at three distinct points, says Prof. K. M. de Silva in ‘A History of Sri Lanka’. Land tax from those who cultivated royal lands was a major source of state revenue. Then came ‘diyadada’ – a tax on water. Finally, a share from any bumper harvest automatically went to the treasury. Peasants had no additional storage facilities. How could one triple-tax a single product? Either the business had to be too lucrative or the tax had to be too burdensome. In this case, probably, it could be more the latter than the former. It was evident from the fact that King Nissankamalla, Parakramabahu’s successor, removed some of these taxes.
Professionals today are the farmers of the Parakramabahu time. They have been suddenly required to pay a tax amounting to 20%-30% of their income (it is interesting that some tax proponents only notice the lower limit). This is similar to working 3-4 months a year for the state for free.
Under normal circumstances, even a substantial increase in taxes may be considered acceptable. However, this is not the case in the current scenario where inflation is skyrocketing. Consumer prices have more than doubled over the past year, and there have been significant increases in the cost of electricity, petrol, and gas. Additionally, food prices have risen considerably and have not reduced proportionately with the recent fall in fuel prices. Almost all commodity prices have jumped by at least a factor of two. Although some may argue that items such as cat and dog food are considered non-essential, it is necessary to acknowledge that the needs such as having a pet are basic human necessities. It is reasonable to protest against the unprecedentedly high taxes in such a context. The opponents of proposed tax hikes should not be labelled as merely driven by greed, as individuals in professions such as doctors, engineers, architects, and academics have invested a considerable amount of time and money to become professionals and expect a reasonable standard of living as a result. It would be unjust to force these professionals to maintain significantly lower standards than what they deserve based on the many sacrifices made.
A counter-argument could be raised here. We live in difficult times and one must make sacrifices. True, but why only professionals? If the nation is facing a crisis and requires increased contributions from its citizens to overcome these challenges, shouldn’t everyone have a shared responsibility to do so.
Excluding certain segments of society and placing the burden solely on the professional community may not be the most equitable solution in the face of a national crisis.
The other potential negative outcome of increasing income tax for professionals is brain drain, which is currently happening in Sri Lanka. In the higher education sector alone, there are 17 state universities with an academic faculty of 11,293 individuals, according to a leading Sunday newspaper
There are certain sections of the population either immune to or gained from the crisis but pay no income tax. Let’s take one example. There are nearly one million tuk-tuk drivers on the road. We can analyse how the economic crisis affected them. In June 2021, two years before the date of penning this, Lanka Petrol 92 was priced at Rs157 per litre. So with a tuk-tuk running about 25 km a litre, the minimum limit of the fuel cost per litre was Rs6.25. To account for traffic, idle rides and waiting time, we multiply this by two, a conservative figure. Then it comes to nearly Rs12.5. In June 2021 the tuk drivers charged Rs60 for a km – the fuel cost was only 21% of it. Then, one year later, by June 2022 petrol prices skyrocketed to Rs470 per litre – three times the previous figure. If only this jump was to be accounted for, the new price would have been in the range of Rs84.5. Still, the tuk drivers started charging Rs120 per km. Let’s say that is acceptable. Rising fuel prices have a cascading effect on other commodity prices. What is not acceptable is them still charging Rs120 per km, when the petrol prices have again dipped by Rs152 per litre from the peak price. The bottom line: They earn an extra profit of Rs30 per km thanks to the fuel price fluctuations due to the economic crisis. And, what income taxes are applicable to them? Nothing!
Another weak counterargument is that tuk drivers earn less than professionals. Maybe, but here we talk not just about tuk drivers. Most variable income earners have the option of adjusting the prices of the goods or services they provide to match the new conditions. Fixed income earners are not given that option. Still, we tax, not the former, but the latter. How fair is that?
Then, at the macro level, taxes are not always favourable for the economy. Sometimes they could bring the opposite outcome. There are enough international examples. In 2012, France, under the leadership of newly elected President François Hollande, raised the income tax rate from 35% to 45%. This tax increase was met with mixed reactions. Some supported it, arguing that it was necessary to make the wealthy pay their fair share. Others opposed it, arguing that it would discourage investment and job creation. Anyway, it did not have the desired effect. The budget deficit did not decrease, and economic growth slowed. In 2014, the tax increase was repealed. Similarly, in 1990, a tax increase in Sweden led to a decrease in the incentive to work, as well as an increase in tax avoidance and emigration. Venezuela faced the same experience in 2013. These experiences suggest that raising taxes on the wealthy can have negative consequences for economic growth. That is why policymakers should carefully weigh the potential economic and social consequences, before arbitrarily raising taxes.
The other potential negative outcome of increasing income tax for professionals is brain drain, which is currently happening in Sri Lanka. In the higher education sector alone, there are 17 state universities with an academic faculty of 11,293 individuals, according to a leading Sunday newspaper. However, only 6,677 professionals are currently employed, leaving more than 4,500 vacancies. Moreover, over 2,000 academics have left the system during the last two years, with nearly 500 of them permanently leaving the country. This trend is also observed in other sectors, such as software and healthcare, with potentially graver consequences.
We have been receiving so many ‘freebies’ for the past 75 years, we have forgotten that somebody has to pay for them. It is widely acknowledged that taxation serves as the main source of government revenue. Therefore, it is universally agreed that citizens have a responsibility to pay taxes
One previous example. Greece has experienced a significant brain drain in recent years, largely as a result of the austerity measures initiated by the International Monetary Fund (IMF). Even before these measures, the economic crisis forced many highly educated individuals to seek better employment prospects overseas. The austerity measures, which resulted in budget cuts to education and research, further discouraged talented individuals from pursuing career opportunities within Greece. As a result, it is estimated that over 427,000 highly educated Greeks emigrated between 2010 and 2019, with popular destinations including Germany, the UK, the USA, Australia, and other European nations. This trend has had a noticeable impact on critical sectors, such as healthcare, academia, engineering, and technology. While the individual impact is difficult to measure, this brain drain has been a significant factor in the country’s economic setback over the past decade.
In several of my previous articles, I have noted that Sri Lanka is at risk of following in the footsteps of Greece rather than Korea in its post-IMF era. Recent developments have confirmed these concerns. Sri Lanka appears to lack a viable strategy for dealing with potential future crises, and our policymakers continue to place undue faith in the IMF’s recommendations without exercising good critical judgement. This closely mirrors the approach taken by Greece, which has ultimately proven to be a flawed and counterproductive strategy. After over a decade of crisis and austerity measures, Greece finds itself in a worse position than in 2010. Sri Lanka’s economic future may well be similarly precarious if we fail to adopt a more judicious approach to policy-making.
In considering the appropriate taxation of professionals, it is important to evaluate viable and reasonable approaches that could generate comparable revenue without resorting to excessive tax rates. Specifically, two key strategies could be employed effectively to achieve this goal. First, all citizens should be subject to income tax obligations, rather than targeting specific segments of the population based on false assumptions about relative earning levels. While it is reasonable to impose lower tax rates on low-income earners, no one should be exempted from contributing in times of national need. Second, all government services should be priced at market rates, with no subsidies provided. Where necessary, social security funds should be established to support the poor rather than through subsidies. Such policies are both economically sound and equitable and offer a viable means of safeguarding the future of the country. It is not reasonable or sustainable for the state to force professionals into untenable positions without offering any alternative means of support or relief. A state must recognize and value the important contributions of its professionals.