Increasing PAYE tax paves the way for an economic recession

Handling the economy at will is dangerous

The government has no economics practice

The effectiveness of employees’ wages has declined by 70%

(Professor Milton Rajaratne-translated by Rumi Speelberg)

Though PAYE tax existed for some time, its rate was affordable to the earner. But in 2015, the good governance government brought that tax to a very high rate. Paying taxes was not that difficult since inflation and exchange rates were low at the time, and tax-free earnings were high.  After 2019 due to the short-sighted administration of the “Wiyath Maga” that tax rate was brought to a very low level and increased the tax-free income to three hundred thousand. That action greatly affected the decline of government revenue.

But the tax rate to be implemented from January 2023 has been raised to 36%, which is unbearable for the salary earners, and the tax-free income is two-thirds and accordingly the tax net has been widened by bringing it down to 100,000 rupees per month.

Due to high inflation and high taxes, commodity prices have increased by three times as a result of which the tangible value of monthly income has declined by two-thirds. Otherwise, to buy a product that was bought last year, now we have to pay three times the same price. In such a difficult background, the working class is about to embark on trade union measures due to the life struggle arising out of the government's PAYEE tax.

There are two consequences of the PAYE tax. One is the state revenue growth effect and the other is the personal income depletion effect. Although the increase of the government revenue due to the taxes is a normal phenomenon, it leads to a severe decline in personal income and leads to an economic recession.

The dire consequences of the new tax rate will pave the way for an economic recession. The economic recession is created since the economy has been in negative growth for many years. As the speed of the economic development is falling down continuously while decking of the domestic consumption results in decline of the domestic mutually as if falling into the bottom of the fatal well, economic growth will experience a negative growth.

What is the benefit of the consequence of raising state tax revenues..? By utilizing taxes collected by the government on expansion of the production or productively, it will result in economic growth and increased social welfare. Countries like Norway and Sweden generate very high tax revenue and provide very high social welfare to the masses including taxpayers.

But the Sri Lankan government is using the state revenue on wasteful expenditure such as maintaining an inefficient and excessive public service, maintaining an overly prosperous political community, maintaining an excessive army, maintaining an excessive number of pensioners, maintaining excessive loss-making public institutions, and maintaining excessive welfare services instead of using productive measures. Those processes do not facilitate economic development.

The effect of personal income erosion is to pay the balance of the salaries after a significant amount of tax is deducted directly. Due to this tax from the monthly salary and the rest goes to the workers. Due to this tax, which is charged at a rate of up to 36%, employees lose thousands to lakhs of rupees monthly in proportion to their wages. The monthly wage earner is a community that has adjusted his consumption pattern according to the volume of his salary. They have many expectations.

Accordingly, they have directed their children to schools in towns, private universities and foreign universities in order to give them a good education. That is a very expensive thing to do. Secondly, they are heavily indebted to banks to buy land and build a house. Thirdly, they are people who have taken out a loan or leasing facility to buy a vehicle.  Also, there are people who get low salaries because they mortgage their Employees’ Provident Fund to obtain a loan which is recovered from their wages.

After incurring all these expenses there is not much money left for living. Whether you earn a hundred or five hundred thousand, you face the same struggle in life.

Up to what extent the new tax rate erodes income, the middle-class community is forced to default on bank loans, life insurance premiums, and lease payments being unable to cover the aforementioned expenses. Or when the bank recovers the loan installments from the salary credited to the bank account, there is no money left to spend on food, health and education. In that case, won't they also become a group that deserves government subsidies to live?

Consumption by the middle class constitutes the bulk of domestic consumption. But local consumption is undermined by these taxes. From grocery stores to supermarkets, from carpentry to hardware, from tea shop to hotel, from pencil to computer, from vegetable to meat, the demand will be reduced due to this tax.

Producers move to reduce production as per the demand falls, or even more. Cutting down employment will be severe than that. The domestic production goes down according to the domestic consumption. Income goes down according to the reduction of the production. Again the consumption goes down according to the reduction of income.

This is the basic foundation of the economic recession. Decline in savings, decline in investment, entrepreneurial inactivity, etc. create a long-term decline in sustained economic growth and the situation is known as recession. When the economy goes into recession, every sector of the economy, including manufacturing and supporting commercial services, gradually deteriorates and is difficult to recover from.

The new tax is going to create such a long-term economic depression in the Sri Lankan economy due to the ignorance of the government. Therefore, after January 2023, we will have to face more severe economic difficulties than the ones we have faced so far. The only way to prevent that situation is to reduce the taxes and reduce the size of the government to match the state income.

This year's budget also did not propose significant measures to reduce the size of the government. The government should withdraw from business activities, reduce the number of public servants and establish an efficient service, cut the benefits given to officials, reduce the number of political institutions, reduce the number of ministries and councilors, reorganize public welfare, and create insurance systems suitable for charging a price for health care and by modernizing education, universities, agriculture, industry and society, it is possible to make the government smaller.

The government is immersed in an illusion about the economy. That is to believe that even if the government does not have money, the people have money. Since the government is an institution made up of the masses, when the masses are short of money, the government is also short of money. Therefore, there is no other option but to limit government spending. The masses also limit their spending. The government is defaulting on foreign debt due to lack of revenue. Employees are going to not pay taxes because of lack of income. Even though the government and the people have suffered the same fate, the government works to exploit the workers.

The government does not know that the efficiency of the employee's salary has deteriorated by about 70%..! The Deputy Finance Minister is reciting some nonsense about 90% should be maintained by the 10%. 10% maintaining 90% is pure exploitation. It is unfair. Instead of hanging on to an unknown formula, what needs to be done now is not to maintain 90% on merits, but to direct them to a productive economic activity. This 10-90 stupid thinking is very bad for the economy.

Trade unions have already expressed strong opposition against the new tax system. There will be no shortage of token strikes in the future. But if the government does not change its position on the tax rate, not only a wave of strikes, but also a general strike at the national level is likely to be created. This is because every employee at the higher levels will be affected by this tax and if the strikes are resorted to, the higher levels of every government agency will be incapacitated. The severity of the economic depression caused by this tax was exacerbated by strikes. The economy makes tomorrow darker than today. In the end, the government has to choose to get out of the recession by making more money circulate among the people and increasing the demand. It can expand local consumption and production. For that, the government has to remove taxes and make money freely available among the people. This is what John Maynard Keynes pointed out as the way out of the American economic depression.

By rectifying the mistake when pointed out instead of correcting the mistake after a while, the economy can be kept from going into recession and the economy can be directed towards growth.

The Sri Lankan government does not make decisions based on economic analysis, but based on psychological factors or the interests of international institutions. This tax proposal appears to be an IMF proposal and it has also been recommended that the government's tax revenue should be increased from 11% to 17%. Although it is not difficult to increase the tax revenue when the economy is working properly, according to today's broken economic situation, that task should be done very slowly. Carefully.

The IMF is not an organization based on economics but an organization based on financial tools. Therefore, the IMF aims at monetary targets but not at development or the overall functioning of the economy. Accordingly, the IMF is an institution like a financial company. There is a saying that doing business with financial companies is not a healthy deal. It has also been alleged that the countries that sought refuge in the IMF were destroyed. In order not to lead the Sri Lankan economy to a recession, the government needs to practice economics on taxes. Controlling the economy at will is dangerous.