Development Destiny to Distortion Taxes


Dr. Sikder Md. Anowarul Islam

January 18, 2014

(Published in LinkedIn)

It was adverse thinking when I expressed my idea to my colleagues regarding growth maximized welfare through consumption tax. As soon as I published my academic paper in the name of Growth, Welfare Maximized Finance and Kuznet’s Pattern Economy in Bangladesh in 2007, many of my colleagues appreciate me to go ahead with this research process but still I have lot of limitations to continue this research specially for the budget and accesses to the time series data of income distribution and consumption tax in cross country.

In every promising society the scholars as well as theoreticians believe that consumption tax is distortionary. Because both poor and rich people bear the same tax burden through consumption tax. Poor people pay more in the social process rather than rich for economic development especially in developing countries. Imagine a developing county where 60% of poor people struggling for earning less than one dollar per day. Who will give them hope for sustainable economic development without accommodating resources for their own? Almost 10-12% peoples in a society own 90% percent of their disposable income of a country like Bangladesh. Rich countries also have better income distribution rather than low and middle income countries. Still we could not conclude the issue that what would be growth maximized optimal income distribution of a country.

If we follow the Kuznets pattern relationship between inequality and economic growth in long run economic development process for the optimal income distribution of a country, then we may get the status of the income distribution of average income peoples of a country, but by this economic development process, we cannot conclude the status of optimal income distribution of a society. Because a country always shifting the age of knowledge from one stage to another. They are also changing the environment for the stage of practicing democracy from one stage to another. The challenge of a rich country for income distribution is more complex rather than a low and middle income countries. Because peoples of low and middle income countries are the beneficiary of knowledge spillover and technology transfer for their stage of long term sustainable economic development.

But an industrial country has the ample challenge for steady state economic development due to various reasons. Aging population, burden on social security program, dependency on employment generation on large scale industries, low entrepreneurial stakes, huge burden on research and development and opportunity cost. They are used to tax on income of their rich peoples with a view to welfare maximization. Positive trade balance put then low cost of outsourcing due to foreign exchange benefit for a certain period of time. Rich peoples are taxing and accordingly poor peoples are getting benefit from low cost imported goods and services for their steady state economic development process.

Positive trade balance increasing income disparity between rich and poor countries especially for the low income countries in initial stage of economic development. We cannot change this scenario due to globalization process and best hope for the better world for long term utopian convergence as economist believe since long. But what we can do that we can change the mind set of poor nation that they can boost capital accumulation through public finance and private public partnership.

Off course, the source of public finance in this process should be from consumption tax. In many developing countries, 80% of public budget are depending on indirect distortionary tax and they are straggling severely low capital accumulation process due to low savings rate and accordingly high interest rate on private finance.The distortion from consumption tax shall be overlapped through production of public goods in long run in a country, those who are absolutely depending on their public finance from distortionary indirect taxes. But as per the public choice theory and majority voting process for equity and justice, it would be very difficult to campaign these issues to the poor people by the respective government due to adverse impact on public choice since the majority poor have already been prepaid the cost of development to expedite their nation.

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