Tax eaters, taxpayers and wealth creators

In any open, free economy operating within a democratic political framework, three fundamental types of economic human beings can be discerned, at work and play, defined and identified.

They are tax eaters, taxpayers and wealth creators. These are not exclusive categories, a tax eater also may pay some taxes, and a wealth creator will pay some taxes, and also eat some taxes, in the guise of subsidies provided to his enterprise, for example.

A tax eater may actually create wealth, may be in the informal economy and therefore pay no direct income taxes on that wealth. Let’s define the categories in more detail.

TAX EATERS

Tax eaters are basically people and/or institutions, who consume the revenue, not only the revenue raised from national taxes and other national sources, but also the revenue contributed by foreign tax payers, paid to their national governments as taxes and granted or loaned as foreign aid to developing countries as commercial, concessional or no interest loans, or given to International Financial Institutions (IFI), which in turn disburse such funds to support the development effort of Less Developed Countries (LDC).

In any economy taxes are basic. The state needs a method of meeting its financial obligations. Taxes are raised for this purpose. Nations states also use taxes as a means of redistributing wealth, taxing the rich and providing subsidies to the poor.

Sometimes, when a Treasury finds that taxes are not sufficient to meet the expenditure and other than the traditional ways of raising funds, such as exploiting captive funds, obtaining concessional or commercial loans, they also sell state assets including land.

But normally, state land is not sold outright; it is given on long lease. Like the Regional Plantation Companies have been leased out the plantation lands and the Trincomalee Oil Tank farm to the Indian Oil Company. But currently the state is selling land outright, for an upfront payment in cash; the short term cash flow problems must be serious!

Selling State land

It is said that the Galle Face land for Shangri-La hotel, the former Commercial Company land near the Beira Lake, the Kuchchaveli Beach frontage land, the land for the Kalpitiya tourist development are all being sold for a cash down, upfront payment. Government officials have said that they hope to raise US$ 500 million in this way.

Other than the Shangri-La hotel, China National Aero Technology Import & Export Corporation is also said to have been sold prime Colombo land outright. Is this a state-owned corporation? If so, that means a foreign sovereign nation has got title to land in Sri Lanka. Normally such sales are allowed only for diplomatic premises, not for commercial development, even state land for a foreign military base is leased not sold.

Such a permanent alienation of state land is unprecedented in recent history and has not taken place, probably since colonial times, after the Kandyan Kingdom was ceded in 1815, and the Waste Lands Ordinance was promulgated to declare all lands for which there were no title deeds as ‘Waste Land’ and alienated at a pittance to foreigners for opening up coffee plantations.

There is a point of view that these lands are 99 year leases, but as far as the public domain is concerned, there seems to be no definite information. But all these enterprises will end up paying taxes.

Professional politicians

Let’s try to identify the Tax Eaters more specifically. Professional politicians who have no other legitimate enterprise from which they derive income, whose task it is to formulate the policy framework within which the nation is governed are clearly net tax eaters.

They are remunerated out of the national revenue raised by taxes and borrowings by the exchequer of the country to undertake this specific task. In most countries they are well looked after due to the need to have them free to make unbiased policy choices for the good of the nation, they need to be unbiased and insulated from undue influence. However, due to the amount of power they wield, abuse of power and corruption have unfortunately become synonymous with political authority.

Witness India, with criminality and legislative authority going hand in glove, large numbers of elected members, at all levels of government from Panchayat raj, to local, to state to national, having a known criminal record.

The Palace of Westminster, the mother of Parliaments is no better, with members being forced out due to submission of false reimbursement of expenses claims. A US Congressman was found to have stacks of dollar notes stashed away in a freezer is his apartment!

Closer to home, duty free vehicle permits are being illegally sold in the market like confetti being thrown at a wedding, and it is said that the parate execution limit for seizure of assets has been increased so that the limit of the loan for the purchase of these vehicles is below the limit for which the lender can move for parate execution!

National bureaucracy

The members of the executive arm of the government, the national bureaucracy, including pensioners, are also Tax Eaters. They, who provide the in the words of Prime Minster Lloyd George of England, the ‘steel frame’ of government, too are paid out of national revenue.

Lloyd George was speaking about the colonial Indian Civil Service. The current civil servants salary and allowances, paid from revenue, is in Sri Lanka free from income tax and they are from time to time also given concessions like duty free vehicle import permits, etc.

However these perquisites of office have not always kept the bureaucracy squeaky clean; witness India, where the chief anti corruption official, the Chief Vigilance Commissioner himself, has been hauled before the Supreme Court by a public interest petitioner challenging his integrity and suitability for the post.

The Judiciary

The Judiciary, which is called upon to adjudicate in disputes between the subject and the state and disputes among the subjects themselves, are also a category of tax eaters. The Judiciary has to be independent and autonomous and without bias, dispensing free and fair justice to all comers without discrimination.

However, as in the other categories of persons who are remunerated out of revenue so that they can do their jobs insulated from economic and other pressures, there have been cases of the Judiciary falling short.

Another example from India, where the Supreme Court referred to a State High Court as an ‘Uncle and Nephew’ Court, the uncle being on the bench and the nephew appearing before him as a lawyer and getting preferential treatment for his clients!

Any citizen, who is on a welfare subsidy, such as the Samurdhi scheme or an Internally Displaced Person (IDP) due to the recent floods, are also tax eaters. Even a prisoner in a jail is ‘enjoying’ the hospitality of the nation’s taxpayers and is therefore a tax eater.

Police and military forces

The police and military forces of a nation are also tax eaters, in that they are funded from taxpayers’ money. But they play an important role in providing peace and security to the nation. Further, they may also earn taxes and create wealth in diverse ways, though this may not be their primary function. The police forces compel motorists to pay fines to the State.

In some countries like Pakistan, Bangladesh and Indonesia, the military has vast business empires which influence national policy across the board. Reminiscent of President Eisenhower’s American ‘Military Industrial Complex’?

The Israeli Defence Forces cyber warfare units are seen as the cradle for Israel’s burgeoning software industry. The internet was initially designed as a secure communication facility for the US armed forces. Some armies grow their own food, retail vegetables and help break trade union strikes in essential services such as operation of ports and harbours.

Dual role

But remember, as I said earlier, a tax eater can also be a tax payer, a bureaucrat who is honest enough to declare to the Inland Revenue Department his private income, say from house rent, for example and sends a return to the department and pays the taxes on that income.

So also a Samurdhi recipient, who is a farmer, may while enjoying a subsidy actually create wealth by cultivating a crop and making a profit from the agricultural enterprise, thereby also becoming a wealth creator.

Even a prisoner making handicraft items in the prison workshop, which are sold in Prison Welfare Shops, may be a wealth creator. It is the net contribution of the individual that matters.

There are politicians and bureaucrats and even prisoners who are said to have vast business empires and who definitely create wealth, one hopes they also pay the taxes due on the income and the value added! If they do, then they will be definitely tax payers and wealth creators!

Regarding subsidies, studies have shown that Samurdhi is targeted so badly that some real big time rural businessmen also are Samurdhi recipients, if they also pay the taxes they should be paying, and then they definitely would be ‘net’ tax payers and probably wealth creators.

State-owned monopoly providers of utilities such as electricity and water are in most economies serial tax eaters. They are bloated, wasteful, some corrupt, inefficient, rent seekers who survive on subsidies provided by the consumer/taxpayers.

TAXPAYERS

Now let’s take a look at taxpayers. Any citizen who has a file at the Department of Inland Revenue and pays taxes is a taxpayer. So also any person who buys an imported item at the bazaar, the item has been subject to import duties at the point of import in Sri Lanka.

At the point of purchase itself, the transaction attracts Value Added Tax, which the purchaser has to pay, according to law. Even a poor common homeless destitute beggar buying a cup of tea, a cigarette or even a chew of betel, out of the collection of alms for the day, is a taxpayer, in one way or the other.

ATM transactions, telephone calls, vehicle ownership, airline tickets, virtually each and every human endeavour attracts some sort of tax. Even a birth, a marriage or a death, will in one way or the other, entail a contribution to national revenue at the point of registration of the event.

Even an enterprise or an individual, which exists, or tries to exist totally in the informal or even the ‘black’ economy, somewhere along the way, at some point of time, in the course of some transaction, contributes to revenue, even if the activity he indulges in is outside the pale of the law.

Even foreign visitors to this thrice blessed land contribute to revenue, from the air ticket which is taxed, the visa fee, the hotel room and each and every purchase he or she makes.

It has been said that the only things that are certain, unchanging, constant and cannot be avoided in this world are change itself, taxes and death! So if you are born in this blessed isle, you pay taxes, period. In addition to having to die, and changing and ageing all the time!

A correlative to taxpayer are tax evaders and tax avoiders. Those who arrange their financial affairs in such a manner that they can avoid tax liability by complying with the letter of the law and not incurring a liability to pay taxes are tax avoiders. Tax avoidance schemes are arranged to achieve this aim. Tax evaders on the other hand are those who incur a tax liability but evade paying up, that is contravening the law.

WEALTH CREATORS

Who are wealth creators? Any person who carries out an enterprise which produces a product or a service which a consumer purchases, at a price which gives the producer a margin for himself, thereby giving him a surplus, creates wealth.

This wealth is saved, invested in housing, land, corporate shares, education, health and recreation among many other things. Supply chains develop to resource raw material, manufacture the goods, and supply the goods to markets and consumers both locally and in foreign climes.

Wealth creators are people who have business ideas, who see a market opportunity and step forward to produce goods and services which consumers are willing to pay good money for. They are innovators in the real sense of the term.

They introduce new things, new ways of doing things, most times creating a demand for a good or service which did not exist before, and they make a profit by doing it. Persons who work in wealth creating enterprises and businesses such the plantation industry, migrant workers, the garment industry and tourism, are also contributing to wealth creation.

Supportive environment

Wealth creators need a peaceful, certain and orderly supportive environment to operate. Infrastructure, law and order, political stability and political certainty are essential. Power outages, bad roads, clogged ports and airports, policy flip-flops and political violence and uncertainty are an anathema for any person hoping to start and run an enterprise.

The availability of finance at reasonable interest rates and an effective stock market at which funds can be raised from investors is essential. The existence of a mature venture capital industry enterprise would assist wealth creators a great deal. A transparent tax regime, an efficient bureaucracy and politicians who do not interfere in matters which do not concern them and limit themselves to clearly indicating the parameters of policy are needed.

The role of the state must be minimised to the bare essentials and the wealth creators given the space to run their enterprises, without unfair competition from state enterprises or state-sponsored enterprises. In other words, wealth creators need a level playing field. The policy must attract wealth creators to add value to the primary products and resources available. The availability of a stable hard working productive labour force is vital.

Contributing to national wealth

Wealth creators contribute to the national wealth. Clearly it is in the interest of a country to maximise the number of wealth creators. The policy framework and the supportive environment are vital.

Mentor Minister Lee Kuan Yew of Singapore, some time ago, when he was Prime Minister, mused whether it would be in the interest of Singapore to give the wealth creators an extra, supplementary vote at elections.

He made this point at election time, because the opposition was promising to raise public servants salaries and waive all housing loans of occupants of National Housing Board apartments, if elected. This would have resulted in Singapore’s budget going into deficit and revenue going below expenditure!

Lee’s point was that the only people who would not be seduced by this kind of financially insane campaign promise would be independent wealth creators, who are not dependent on government for their economic wellbeing and appreciate the value of a balanced budget, low inflation, no budget deficit and a stable exchange rate, etc.

Luckily for Singapore the average voter had the sense not to get misled by this sort of ridiculous opposition promise. In South Asia we know what attractive election promises loan waivers are to rural farmers.

In one case one politician went on record saying he would abolish Pay As You Earn (PAYE), a tax recovery scheme, not a tax per se, and some gullible voters thought that they would cease paying taxes!

Not realising that the only difference was that they would have to pay their tax in a lump sum, as in pre PAYE days, instead of in instalments as in PAYE! With such gullible voters, one sympathises with Minister Lee.

Clearly in an open economic democratic system, it is in the interest of the national economy to increase the number of wealth creators. This calls for a concerted national policy effort. To formulate a policy one needs accurate data. We need to classify all Sri Lankans into the three categories of ‘net’ tax eaters, taxpayers and wealth creators.

‘Net’ status

Policymakers have to be able to identify the ‘net’ status of each individual. Does he ‘pay’ more taxes than he ‘eats’? Is he a net creator of wealth? Does he pay any direct taxes at all, if he creates some wealth? We also need data to ensure that tax evasion and tax avoidance is minimised.

Every Sri Lankan over 18 years of age has a National Photo Identity Card (NIC), with a unique number. We need to upgrade and enhance this to system in which the identity can be confirmed on line through a smart card, connected to a computer server 24/7.

At any point a person entering into a transaction at the Customs, at the Revenue Department, at the Immigration & Emigration Department, registering the ownership of a vehicle or even when he is entering into a run-of-the-mill transaction, his status as a tax payer or wealth creator can be ascertained on line, in real time and the entitlements and services he is entitled to can be determined, according to his status.

The pension number, the income tax file number, the company registration number etc. can also be accessed through the smart card. The individual will get a much better quality service, and the state will have data at their disposal to decide and determine a policy framework which will be designed to assist wealth creators to maximise their efforts and also to collect additional revenue.

India’s Aadhaar scheme

India is already doing this, through the Aadhaar scheme, even though they do not have an existing National Photo Identity Card system in place. One of the founders of software giant Infosys, Nandan Nilekani, has been appointed as head of the Unique Identity Authority of India, with cabinet rank, and is starting a massive operation called Aadhaar, which will result in every Indian having a unique identity number, with an instantly verifiable photo identity card.

The unique photo identity smart card will capture a whole set of information such as the head of family, address, assets, annual income, educational qualifications, and religion, etc.

Nilekani, using his software jargon, says he sees his Unique Identity Authority “as a vast server, loaded with biometric and other details of every Indian, which will be accessible 24/7 using the new identity card. Biometrics of this scale have not been tried before, the data will be stored online and accessible for instant on line verification of the identity of every Indian”.

This is a revolution which will have a massive impact on the Indian economy. Sri Lanka is halfway there already and with our NIC, going the rest of the way will help a great deal to identify the net creators of wealth and design a policy framework which will provide them with a positive supportive environment. Our wealth creators deserve this.

(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)