By Hema Senanayake –
A discussion on the subject of taxation might be appropriate at this point of time as the parliament is getting closer to debate the budget for the year 2016. The budget is all about taxes if the small portion of debt-free foreign grants is ignored. Perhaps, one might think that national budget is about taxes and debt because the budget deficit would mostly be financed from borrowings. However, since current loans will have to be paid back through future taxes, I prefer to suggest that national budget is all about taxes to be levied at present or future.
Let me begin by pointing out an important assertion about taxes. For administrative purposes the point of the collection of taxes may vary but all taxes are truly paid by the producers (employees and owners) of revenue generating enterprises if expatriate remittances are not taxed. As far as I know, Sri Lanka does not tax expatriate worker remittances. Therefore, again, I insist the point that, “all taxes are paid by the producers of revenue generating enterprises.
Now, one might think that not only the producers of revenue generating enterprises are paying taxes, but some employees of the government do pay taxes. The simple explanation for this argument is this: the producers of revenue generating enterprises are paying taxes to enable the government to pay its employees a sum that includes a portion of disposable wage income and a sum for the payment of tax. Perhaps this arrangement might be useful to implement an equitable tax policy. However the ultimate truth is that only the revenue generators can pay real taxes.
Therefore, clearly, tax is a part of income deprived to direct producers of revenue generating enterprises. However, the tax money is expended by the government in producing things of common interest of the society such as general administration, law and order, judicial services etc. Karl Marx explained this story of tax clearly. He said that, “What the producer is deprived of in his capacity as a private individual, benefits him directly or indirectly in his capacity as a member of society.” (www.marxists.org); this is the basis and purpose of taxation. Taxation is a mechanism to distribute the means of consumption in any given period while producing common interest. Is the Jumbo Cabinet a common interest of Sri Lankan society? I do not know.
Revenue generating enterprises in the real economic sector play the most important role in our economic system. It is where the economic system’s “capital money” and “consumption money” are produced. Perhaps these terms might be uncommon in economics but they make sense in making economic policies and in making structural adjustments to our economic system. For an example let us take the term “consumption money.” What is this?
Let us assume that you go to a restaurant. You spend money to buy something to eat and do you call the money you spend as capital? No, we do not call it so. That money is used for consumption – and we name such money as “consumption money.” When the money is spent on food, the money is gone and you can’t recover it. That is why household expenditures fall into the category of “consumption money.” By this definition, what the government is spending is “consumption money” because the government cannot recover it. Now, where is this “consumption money” produced in the economic system? Let us investigate further?
Producers of revenue generating enterprises also use money to employ the resources for production. They recover the money spent in producing things usually with a surplus, at the point of sale. Therefore, the money expended by the enterprises should be different from the “consumption money.” If any money spent is recovered through sale proceeds then we name that money as “capital.” Primarily, capital has to be recovered through sales proceeds, if it wants to be capital. Enterprises convert money capital into productive power during the production process in employing machinery, raw materials, utility services, and labor. Enterprises recover the capital invested through sale proceeds. Accordingly national revenue or proceeds could only be generated by enterprises –and not by any other entity. This clearly intimates that both capital and “consumption money” is made available to society by entrepreneurial activity.
The concept of national proceeds is not a difficult concept to understand even though it is not formally accounted. According to John Maynard Keynes total national proceeds are the sum of all proceeds of income generating enterprises of the real economy.
An entrepreneur who produces something would sell his produce either to a consumer or an investor. There is no other third party by definition who can buy the product or service of an entrepreneur. Therefore an entrepreneur generates his or her proceeds from consumption or/and investment. So, sum of all these proceeds are the sum of national proceeds.
In general (there are a few exemptions) these national proceeds would allocate consumption money and investment money in the economy. So, if we increase national proceeds what does it mean? It means that we increase the consumption as well as investment. It further means that people’s wellbeing is increased. Isn’t this what we want?
Accordingly, in principle we should not agree for any budgetary proposal that would hinder the expansion of national proceeds. In other words I would support policies that would increase national proceeds or in other words “sellable output.” In order to understand this point let us take a hotly argued example.
Let us assume that we allow for the establishment of private universities. This means we convert part of the tertiary education into “investment mode” from “consumption mode.” It will expand “sellable output.” Hence, the establishing of private universities increase the sellable output or national proceeds, according to the above said theory, so, I have to support for the establishment of private universities. But you can’t do this, when the distribution of distributable income (or output) is not right.
Therefore, when the government designs its taxation policy, the objective must be to ensure a proper distribution of distributable income so as to create a space to increase national proceeds or sellable output. This should be the objective when the government prepares its national budget.