Introduction

In modern economies, taxes are the most important source of Government revenue. Taxes are levied in almost every country of the World, primarily to raise revenue for Government expenditure, although they serve other purposes as well. In modern days it cannot be even thought of that any government can run its functions and discharge its activities without collecting taxes as revenue from its subjects. Actually taxes play a pivotal role in the socio-economic development of any country. Taxes are compulsorily levied upon the subject of a government and it differs from other sources of revenue. Taxes are paid to the Government with no direct exchange values received. But collection of taxes is supported on the ground that taxes are presumably collected for the sake of the welfare of people of a country as a whole wherein the liability of the individual taxpayer is independent of any benefit received. "The taxes are intended to meet the general expenses of the Government which confer a common benefit." Taxes are what we pay for a civilized Society. -Justice Oliver Wendell Holmes. Taxes are most commonly classified as either direct or indirect and example of the former type being the income taxes and of the later the sales taxes. Direct taxes are primarily taxes on persons; they are aimed at the individual's ability to pay as measured by his income or his net wealth. Indirect taxes are levied on objects, services and transactions. They include general and selective taxes on sales of consumer goods, value-added taxes, taxes on goods in the process of production, taxes on legal transactions, and import or customs duties.

What is Wealth Tax?

A wealth tax is a tax which is levied on the wealth held by a person or entity. Most wealth taxes around the world are based on net worth, the amount of someone's wealth minus his or her debts. Several nations use a wealth tax to raise funds for the government, with varying types of wealth taxes in use, and some economists have suggested that there are definite advantages to wealth taxes which should spur more nations to adopt them. The style of tax usually contrasted with a wealth tax is an income tax, which is based on the amount of income someone makes in a year. Income taxes are sometimes heavily criticized because members of the middle and lower classes tend to pay disproportionate amounts, and many wealthy individuals pay relatively low income taxes. Proponents of wealth taxes suggest that these taxes would promote more equality in taxation while also raising large amounts of funds for the government by taxing the substantial holdings of the wealthiest members of society. Included in the assets assessed under a wealth tax are deposits of cash, real estate holdings, investments, trusts, and shares in businesses, among other things. In a nation with a wealth tax, people are obliged to total their investments and then subtract debts such as loans, mortgages, and so forth to arrive at their net worth. The wealth tax is a percentage of the net worth which can vary depending on someone's total net worth and the nation he or she lives in. The goal served by wealth taxation would be to facilitate a more just distribution of the tax burden and resources in society. A fairer distribution will enhance equality of opportunity, reducing - if not redistributing - the existing inequality of wealth holding.

Introducing Wealth Tax in Bangladesh

Recently there has been some discussion about the possible introduction of a wealth tax in Bangladesh. In a recent press conference, the chairman of the National Board of Revenue (NBR), Mr Nasir Uddin Ahmed, along with key NBR officials, have discussed the tax, which is likely to be made effective from fiscal year (FY) 2012-13. But, the question remains whether it is a time for a wealth tax in Bangladesh. If it is so, how would it work? Considering the current tightening economic climate this might look like a timely initiative. However, the basic proposition of this tax has a different meaning. This lies with the key principles of taxation and redistribution of wealth. This is also driven by rising income inequality in Bangladesh, where only a small percentage of wealthy people share the majority of the State's wealth, and enjoy the most. The question arises then, how can a wealth tax be introduced under the existing tax system, which often has high management costs, for both taxpayers and the revenue department, compared to other taxes? The answer is not easy, but not difficult.

Principles of a Wealth tax

First, let us focus on the basic principles of a wealth tax, and why it is important in the current socio-economic and political climate in Bangladesh. Wealth tax in not new concept in Bangladesh. In 1983 it was first introduced in our economy. However in this case only a certain portion of an individual's tangible wealth is taxed at a certain rate, which is often a flat rate but may vary under different circumstances or jurisdictions. The tax base may include - but are not limited to - a variety of assets such as real estate, land, family home, investment property, and private firms and forests lands. For instance, in the United States, wealth taxes are annual taxes on the market value of real estate, ranging from about 0.4 per cent in Alabama to 4.0 per cent in New Hampshire.

The Pros and Cons of Wealth Taxation

The arguments, both in favour of and against some form of wealth taxation, are numerous. It should, however, be borne in mind that many of the arguments, both favourable and unfavourable, are directed towards a specific type of wealth tax. The main areas for consideration revolve around equitable and social concerns such as revenues, progressivity, equality of opportunity and democracy; economic concerns on a macro and micro level regarding efficiency incentives and capital formation; and finally, political and administrative concerns involving expediency, cost and effectiveness. The Arguments and Counter Arguments There are three main arguments that support the imposition of wealth tax. These relate to revenue productivity, allocative efficiency and equity -- considerations which should form the basis of a country's tax structure. The merit of each of these considerations is examined below in the context of wealth tax. Revenue productivity: Tax-GDP ratio in Bangladesh is known to be abysmally low. Hence the need for raising the ratio can not be overemphasised. However, given that the tax would be limited to the city corporation areas only and exemption has to be provided for owner-occupied property, revenue yield is not likely to be substantial.

Allocative efficiency: The efficiency argument is based on the assumption that the tax would shift investment away from supposedly unproductive investment in real estate to productive sectors. There exists considerable shortage of dwelling facilities in all major cities of the country. In this situation, investment in real estate can be hardly considered unproductive. Besides, investment decisions in manufacturing, service industries and other productive sectors are likely to be determined more importantly by considerations such as availability of skill, assured supply of gas and electricity, access to other infrastructural services etc. rather than tax differential.

Another efficiency-related argument is that the proposed tax would encourage real estate investment in areas outside the city corporation areas. This argument also does not seem to have a solid basis. It may be recalled that during my tenure as adviser, I had introduced extended tax holiday for multi-storied housing built outside metropolitan areas, but this measure failed to produce any perceptible impact. Furthermore, inclusion of business premises, including factories, in the tax base would raise the cost of business and may adversely impact production and growth. It should also be noted that there already exists a tax on property imposed by City Corporations. Subjecting the same base to taxation by multiple authorities and also the income derived from the base can be hardly considered efficient. Equity: Equity argument is based on the logic that income plus asset is a better measure of the ability to pay, rather than income alone. However, this logic suffers from several deficiencies that deserve serious consideration. First, real estate is only one form of wealth or asset. There are others such as stocks, bank deposits etc. In the present state of capital market, imposition of tax on the value of stocks held by an investor is out of question. Similarly, the banking system in recent times has been experiencing undesirably low deposit growth. So, tax on bank deposits would also be a preposterous idea specially when the inflation rate is high and the yield on bank deposits is unsatisfactory. A new tax on bank deposits is likely to encourage demonetisation of the economy. A tax on real estate is, therefore, a discriminatory among assets. Second, the addition of asset as a better measure of ability to pay is justified only if the asset yields income. There already exists income tax on rental income. Third, given that there exists considerable mismatch between demand for housing and supply, the burden of the tax will, in all probability, be shifted to the tenants; the incidence of the tax will not fall on property owners. This would also seriously undermine the equity impact of the proposed tax.

Administrative and legal complexities An important criterion of a desirable tax is its simplicity. The administration of wealth tax by the central government will be confronted by several administrative and legal complexities. First, whatever the rate of the tax, it should be imposed on a clearly identifiable base. In the case of wealth tax, the obvious base is the value. However, there may be several valuations: cost of construction or purchase value, registration value, valuation assessed by the Municipal Corporation while imposing its own wealth tax, valuation declared in the wealth statement as part of income tax return, market value and valuation done by Public Works Department (PWD). Each of these has its own merits and demerits. Second, in many cases when the original owner of the property expires, no mutation is done and the property continues in the name of the original owner. The income or the sale value of the property (if it is disposed of) may be shared by all the heirs or only a few of them may be actual beneficiaries. In such circumstances, who should be liable to pay the tax? Third, it is a common practice in Bangladesh to hand over a vacant land or a house previously occupied or rented out by the owner to a developer with a Power of Attorney to construct a multi-storied building in exchange for a number of flats and, may be, some cash. Neither the original owner nor any purchaser enjoys "de facto" ownership till the construction is completed and flats are handed over to the original owner/purchasers. The transition period may have duration of three to five years. Who will pay tax during this period -- the original owner, the developer or the purchasers who have got possession of the flats? Fourth, presumably for the purpose of calculating tax, any loan against the property has to be deducted from the value (determined by whatever criterion) to arrive at a net value. In many instances, individuals may borrow from their friends and/or relatives or even from banks without any formal assignment of

the loan to the property. This will become a source of conflict between the tax payers and the tax administration and also encourage excessively leveraged financing in replacement of deployment of one's own saving. Another complication relates to whether depreciation should be allowed on the original valuation. Fifth, due to valuations and accounting difficulties, wealth tax systems often face high management costs, for both the taxpayer and the administrating authorities. For instance, in the Netherlands, the aggregated cost of the tax's yield was roughly five times than that of income tax. Similarly in France, an introduction of the tax caused capital flight, brain drain, loss of jobs, and ultimately, a net loss in the tax revenue. Sixth, the introducing wealth tax would be 'insulting businessmen' who contributed to the growth of the national economy. Businessmen will invest in other countries if such activities continue.

How would a Wealth Tax Work?

According to tax policy experts, the best way to implement a new tax is always a gradual transformation of the tax policy through a gradual introduction of this tax, and in the case of a wealth tax, an ideal solution could be imposing the tax at a lower rate. Further, the tax base needs to be defined. The main areas of wealth tax may include- investment properties such as unit or apartments, house, land including swamps and water bodies which could be used for real estate and housing. Lakes, swamps, canals and rivers in most cities in Bangladesh are often encroached out by highly influential real estate developers. Including such future development sites into wealth tax may help reduce such encroachment. Expensive family homes could also be included in the tax base, which could help reduce the existing high level increase of home or unit prices. However, there is a need to have a tax free threshold for less expensive owner occupied homes or units. For instance, in a recent tax review in Australia, only family homes valued at $2.0 million or more were proposed for such tax. Taxation experts and social welfare groups supported this measure as a way of the making the tax system more equitable. The proposed wealth taxes in Bangladesh need to provide certain exemptions as well. These may include investment property or land of non-residents or expatriates, owner-occupied family homes or units used as a place of principle residence and worth below a certain threshold level, land used by religious and charitable institutions, agricultural land, and farms or forest land.

A tax credit or provision for tax concession could be given to individuals and organisations that may have done environmentally-related investment such as in farming or forestry. Such a measure could yield a double dividend to the economy. First, by increasing environmentally-related investment that can help build a green and low-carbon sustainable economy, and second, by helping agricultural growth and improving forest cover.

Concluding Observations
The road to effective tax reform is always difficult, and Bangladesh is no exception. If a wealth tax is to be successfully introduced in Bangladesh, the NBR needs to carefully consider a wide range of issues. Effective tax reform will require: open and transparent engagement with stakeholders, clear communication through the media to help people to understand the implications of this new tax, making the tax as simple as possible to minimise compliance costs for taxpayers, as well as administrative and compliance costs for the Board and the taxpayers. A poorly-designed and untested tax reform is always risky and can cause unrest and chaos, as well as political unrest and discontent. Thus, to make the wealth tax in Bangladesh a successful and sustainable tax reform, the National Board of Revenue should adopt a fair and transparent approach as well as conduct an in-depth analysis of the robustness of the wealth tax before its large-scale introduction in Bangladesh.