Why taxation matters

by Prof. Jagath WICKREMESINGHE

Countries largely depend on taxation, which is the main source of revenue. From time immemorial the state levied taxes. To cite an example, there were different kinds of taxes imposed during the times of the ancient kings in Sri Lanka. The British rulers too imposed various taxes such as body tax, dog tax etc on the people. Taxes however, are basically trade-based.

Taxes being levied both directly and indirectly are appropriated chiefly to provide public welfare. In Sri Lanka for example, the public sector salaries and wages, free education, defence, health and other welfare programmes are entirely financed from the public taxes. When the State revenue goes down it has its impact on those programmes.

Although the government is not a trading enterprise run on a profit basis, this is how the taxes become a must for its survival and continuation of its activities, Revenue raised out of taxation will go back to the public in the form of ‘dividends’. “Government is truly defined as a “public entity”.

There is a novel theory of recent origin on taxes. The neo-liberals argue that a government need not largely depend on revenue raised from taxes! It will certainly restrict the mandate of the government and its functioning. Its scope would be limited to maintaining law and order, judiciary, policy matters etc., leaving all others at the hands of the private sector! That is the neo-liberal theory on public taxes. Their policies only entitle a government to a nominal tax. It has to be pointed out that neither a neo-liberal economic policy nor a tax policy would be suitable at all for a country such as Sri Lanka. Not only developing countries such as Sri Lanka but such a so-called capitalist country as South Korea and several other countries of its ilk have recognised the importance of State intervention in economic development. In actual fact this was the situation both in Sri Lanka and India after the national independence.

The mutual relationship that exists between the government’s commitment to economic development and State revenue is a vital factor to be reckoned with.

A neo-liberal tax policy would surely fit in with a highly economically advanced country because of its “fine tuning” system. As its economy is flourishing, the limited taxing would do well! However, as we are a developing country and also a welfare State, such a limited tax policy would be a misfit to Sri Lanka.

Adam Smith, the legendary godfather of Capitalism held the view that the tax revenue was useful to strengthen the defence of the country to thwart an external aggression, to suppress internal rebellion and to develop infrastructure facilities. As I said earlier Sri Lanka is a welfare State and she cannot be confined to Smith’s principles alone.

With the advent of the J. R. Jayewardene regime in 1977, the State sector and its welfare regimen lost its vitality. Later it was the SLFP-led UPFA government that midwifed its resurrection.

The other significant factor is the escalation of defence expenditure due mainly to the ongoing war to wipeout LTTE terrorism.

We must bear in mind that nothing can be won, unless we are ready to make some sacrifices to help liberate the country from the jackboot of terrorism and in the context of the country’s development.