The taxman cometh (and this time, he’s serious)

Why ‘don't ask me what I want it for, if you don't want to pay some more’ doesn’t cut it anymore

Sally Tyler

Economics and finance, Government and governance | Asia, South Asia, Southeast Asia, The World

20 April 2017

Enhanced tax collection efforts in the US and Asia will succeed only if taxpayers have confidence in the public sector, and elected officials must set the example, Sally Tyler writes.

In Washington, DC, it’s tax time, an annual Spring occurrence as predictable as cherry blossom season (though not quite as photogenic). This year, the US will resume using private sector workers for collections from tax delinquents, a practice which had been discontinued after the Internal Revenue Service (IRS) determined that agency employees could do the work better. Venerable statesman Congressman John Lewis called the new initiative a “disservice to American taxpayers,” which “undermines confidence Americans should have in government action.”

At 83 per cent, US taxpayers already lead most developed nations in compliance. But new, more aggressive collection efforts aim to up that rate, and related initiatives are also meant to boost compliance. Though the IRS is prohibited from publishing non-compliance personal data about individuals, most states now publish online registries of tax delinquent scofflaws.

Various “naming and shaming” tax compliance efforts are utilised in many nations. In Mumbai, bands of drummers who make noise guaranteed to rouse the neighbours are stationed outside tax delinquents’ homes; while in the Bihar state and parts of Pakistan, hijra, transgender individuals traditionally believed capable of bestowing both blessings and curses, are employed to persuade delinquents to pay up.

I watched such a woman make the rounds at a Madurai flower market a few years back. She went from seller to seller, with an energetic clap of her hands, offering the chance for either a blessing or a curse for the day. Each seller hurriedly gave her a few coins, and she went on her way. It was unclear whether the merchants simply wanted to avoid a scene, or actually believed in the hijra’s power to curse. Hijra have reportedly been effective at dislodging large sums of back taxes (of which they may keep four per cent), so perhaps both levers are in play.

But the biggest boost for tax collection in India may soon come with the implementation of the new goods and services tax (GST), set to launch in July. The windfall from the GST will likely come from its “tax collection at the source” provision, requiring online retail giants, including Amazon, to collect taxes from each transaction and remit them to the government. Amazon is actively pushing back, claiming that the policy unnecessarily complicates the nascent e-commerce sector, but there are no signs that the government will stand down.

Thailand is also investigating tightening rules around tax collection for Internet and tech firms, and Malaysia’s Inland Revenue Board has recently announced a new “aggressive tax planning” office. In Cambodia, rapidly evolving beyond least-developed country status, the need for revenue has never been higher. The country’s speedy economic growth will likely trigger a decline in support from donor nations, necessitating even higher revenue.

More on this: Indonesia’s tax amnesty may come with a hidden price tag

This demand for revenue creates challenges for the governments involved, but it also presents citizens the opportunity to invest in the direction of the nation, and in doing so, in their own future. Such was the message of President Joko Widodo, as he promoted his tax amnesty plan to attract money parked overseas by Indonesians back home to benefit his ambitious infrastructure plans. But tax participation will only be viewed as a civic opportunity if there is transparency regarding how the taxes are spent, and if individuals think they have a voice in spending decisions.

The concept of public sector accountability was sadly lacking at a town hall meeting last week in the Oklahoma Congressional district of Representative Markwayne Mullin. As the congressman attempted to dodge hot questions, the audience met him with jeers of “We pay your salary.” He responded by telling his constituents that was “bull crap,” because the taxes he had paid as a small businessman support his Congressional salary.

That exchange illustrates a funny thing about paying taxes: once people start doing it with regularity, they want to know where the taxes go, and they become increasingly empowered about voicing opinions on how they should be spent. Leaders of emerging Asian nations will face a similar reality. Invigorated tax compliance to support national growth will bring increased taxpayer demand for accountability.

Ultimately, the argument for value-based participation in a national system of taxation must be made from the top, and in the US, President Trump may be setting himself up to fall short. Almost immediately after entering office, he instructed most federal departments to prepare to cut up to 30 per cent from their budgets in the form of layoffs, seemingly without understanding or regard for the myriad programs administered by the agencies. Now, he has tapped First Son-in-Law Jared Kushner to head an office of innovation, which rests on the belief that the private sector can provide any service faster, better, and/or cheaper than the government.

Trump’s first proposed budget presents a conundrum. Though it includes deep cuts to vital social programs, it also features a 10 per cent increase for military spending. It is unlikely that steep reductions to programs enjoying bipartisan support, such as the Women, Infants, and Children (WIC) program for children’s nutrition, will go through; so if Trump is determined to achieve increased defence spending, additional revenue may be needed in the end.

It is time for the CEO President to accept the fact that he has a new set of shareholders who expect a Return on Investment if they are being called upon for greater support. But this won’t work if he is extending one hand demanding more money for the government while using the other to give a black eye to public programs and the public sector workers who keep them running.

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